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Nothing boring about reliable RPC

OLD RELIABLE TIP OF THE YEAR: Surging demand for rigid plastic packaging, coupled with shrewd investments, international expansion and an improving European economy, make RPC's defensive prospects undervalued.
January 7, 2016

The consumer packaged goods market is shifting away from metal and glass towards more cost-effective, lighter, versatile and environmentally-friendly alternatives. Europe's leading rigid plastic packaging manufacturer, RPC (RPC), has taken full advantage of this inviting backdrop by investing in its existing product range and making acquisitions to broaden its reach and expertise. Supplying products ranging from drinking cups and bottles to deodorant containers and asthma inhalers may not sound very exciting, but the structural growth story, coupled with the company's strong track record and improving consumer conditions in Europe, where RPC generates 85 per cent of sales, makes the shares look a reliable bet for 2016.

IC TIP: Buy at 817p
Tip style
Growth
Risk rating
Medium
Timescale
Medium Term
Bull points
  • Market leader in fast-growing sector
  • Game-changing acquisitions
  • Excellent M&A track record
  • Innovation boosting organic growth
  • Beneficiary of stronger European economy
Bear points
  • Weak euro
  • Volatile polymer prices

Acquisitions have been a major part of RPC's growth strategy and 2015 ended with a major purchase of bottle-top and screw-cap maker Global Closure Systems (GCS). Described by management as a quality, high-margin business, GCS is RPC's largest acquisition to date, growing the top line by a quarter and taking total acquisition spend over the past two years to over £1bn.

As always with RPC's acquisitions, GCS brings a number of advantages. Firstly, it greatly bolsters RPC's exposure to the fast-growing closures and dispensing market, while enhancing the packaging giant's ability to supply tops to complement its plastic containers. It also boosts its raw material buying power in Europe from 5 to 6 per cent of polymer output.

These benefits suggest an enterprise value of €650m (£473m) is a reasonable price to pay. Without factoring in €15m of projected synergies, arising mainly from the group's trademark ability to capitalise on polymer buying and make operating cost savings, the price is equivalent to 6.8 times cash profits. Brokers, who are yet to factor into their forecasts the possibility of extra synergies, cross-selling potential and scope to reduce GCS's tax rate, were clearly impressed. Deutsche Bank, JPMorgan Cazenove and Jefferies expect the deal to lift EPS by 9 per cent, 11 per cent and 10 per cent, respectively, in its first full year, even after the dilution effect of a £233m rights issue to part fund the deal - completed at the start of 2016.

The pace of RPC's acquisitions should not prove too much of a concern. Indeed, given management's excellent reputation for cost cutting, building share in a fragmented European market, entering fast-developing new regions and expanding the product range, it's hard not to get excited.

Proof of management's Vision 2020 investment strategy's success can be found in results for the six months to September 2015. Within that trading period, acquisitions and investments in innovation triggered 36 per cent growth in adjusted operating profits, as the top line rose by the same amount.

Most of these revenue gains came courtesy of last year's new arrivals: Dutch blow-moulder PET Power, Hong Kong headquartered Ace and Iceland-based Promens, with the latter also impressing markets by delivering better-than-expected cost synergies. That's not to say there wasn't any organic growth. The introduction of new products serving buoyant personal care and food markets sent like-for-like packaging sales up 4 per cent. Among the biggest successes was the introduction of Superlock food containers, which offer technology enabling food to be kept at ambient temperatures.

The upcoming trading periods are expected to be even better, as further cost synergies from acquisitions are realised, disposable incomes on the continent rise and polymer prices fall from their previous highs. Moreover, the recent rally of the euro following Mario Draghi's decision not to ramp up his quantitative easing programme could ease the effect of currency headwinds.

RPC (RPC)
ORD PRICE:817pMARKET VALUE:£2.1bn
TOUCH:816.5-817.5p12M HIGH / LOW:823p490p
FORWARD DIVIDEND YIELD:2.6%FORWARD PE RATIO:15
NET ASSET VALUE:236p*NET DEBT:74%

Year to 31 MarchTurnover (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
20130.987629.612.4
20141.059034.112.9
20151.2211938.314.4
2016**1.6415444.616.8
2017**2.1121653.520.9
% change+29+40+20+25

Normal market size: 2,000

Matched bargain trading

Beta:0.64

*Includes intangible assets of £565m, or 223p a share

**JPMorgan Cazenove forecasts, adjusted PTP and EPS figures, restated for rights issue