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RPC's correction spells 'opportunity'

Disappointing first-half results bashed RPC's share price, but there are encouraging signs at the plastics packaging maker
December 6, 2012

Shares in RPC (RPC) plunged 11 per cent as the company announced a sharp fall in profits and investors fretted about its exposure to the eurozone. But, underneath the headline figures, operating profitability is improving and, as the plastics packaging group announces another two-year cost reduction plan, we think the sharp correction could present a good opportunity to buy the shares.

IC TIP: Buy at 388p
Tip style
Speculative
Risk rating
Medium
Timescale
Long Term
Bull points
  • Underlying profit margins improving
  • Focus on higher-growth products
  • Cost savings to come through
Bear points
  • Weak trading in eurozone
  • More restructuring costs

For a company with a strong track record of exceeding the City's expectations, the results for the half-year to end September were a shock. Revenue fell 12 per cent to £518m and reported pre-tax profits were down from £35m to £22m. Stockbroker Panmure Gordon responded by reducing forecasts for the full year from £86.3m to £83.5m (giving EPS of 37.9p) and for 2013-14 from £92.5m to £90.1m (EPS of 40.9p).

There is no doubt conditions are tough for RPC as it makes 64 per cent of its money in Europe and the value of the euro slumped between last year's first half and this year's, hitting profits reported in sterling. RPC is also pushing through a major restructuring plan to adapt the business to reduced volumes. A site at Runcorn in the north-west was closed, but further restructuring was needed to integrate its £205m acquisition of Superfos, which makes injection-moulded containers. As a result, exceptional costs were up sharply from £4.1m to £18.5m.

RPC (RPC)

ORD PRICE:388pMARKET VALUE:£644m
TOUCH:387.5-388p12M HIGH:450pLOW: 319p
DIVIDEND YIELD:4.3%PE RATIO:9
NET ASSET VALUE:159pNET DEBT:69%

Year to 31 Mar Turnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20100.7219.210.78.4
20110.8234.619.511.5
20121.1359.627.714.4
2013*1.0781.238.515.5
2014*1.1190.441.516.5
% change+4+11+8+6

Normal market size:1,800

Matched bargain trading

Beta: 1.1

*Canaccord Genuity estimates (profits & earnings not comparable with historic figures)

However, while RPC's sales volumes are falling - down 3 per cent in the first half - management is shifting the focus towards higher-margin products where there is better growth. Think of moving from making margarine tubs to making capsules for the fast-growing market for swanky coffee-making machines. So, despite the tough backdrop and the one-off costs, the underlying business is improving; adjusted operating profits rose 4 per cent to £47m and margins climbed from 7.7 per cent to 9.1 per cent.

RPC also announced a new two-year cost-saving plan, 'Fitter for the Future'. Management says that, even if trading volumes stay flat, the programme will deliver £4m profit improvement this year, £10m next year, reaching £12m per year in two years' time. This won't come cheap - there is a price tag of around £30m in exceptional costs, including £15m of cash costs, with the majority coming in the second half of this year.