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RPC still under the microscope

Shares in the plastic packager remain under pressure, but is that justified by the expanded group's earnings performance?
June 8, 2017

RPC (RPC) is suffering from a lingering crisis of credibility. Three months on from some highly critical analysis from Northern Trust Capital Markets, shares in the packaging group were marked down on release of full-year figures, which, according to JPMorgan analysts, should have gone "some way towards answering recent criticism of RPC's underlying earnings performance".

IC TIP: Buy at 803p

What's not to like? Amortisation charges tripled from the previous year to £31m, but strip these out, along with other acquisition-linked and exceptional items, and adjusted operating profit increased by 77 per cent to £308m. RPC has scaled up, forking out over £1.2bn on acquisitions since the final quarter of 2015, leading to a revenue surge through to its March year-end. The thing is: no one's really looking at the top line. Instead, as we pointed out in our April review, investors will be zeroing in on "how effective RPC has been in deriving synergy cost benefits and if any margin compression linked to the deals is a temporary effects".

With the integration of French bottle-top maker GCS and British Polythene Industries now complete, the cost synergies estimate for these two operations - plus the previously acquired rigid plastic packaging maker Promens - increased by €5m (£4.3m) to €105m by the end of the 2019 financial year. We can expect further developments on this score, following completion of another major purchase in the form of US-based Letica Corp, a rigid packaging and food service product specialist. Despite this progress, it seems the jury is still out on the question of post-acquisition savings.

This is also borne out by one of RPC's key metrics. The group managed to ratchet up its return on sales by 60 basis points to 11.2 per cent, although this was achieved despite "the dilution of lower margin acquisitions". Polymer resin accounted for around 36 per cent of adjusted costs during the period, and while RPC has various hedging and pass-through arrangements in place, it encountered a £3m net polymer headwind, an increase of £14m from the previous year's prices tailwind.

Deutsche Bank gives pre-tax profit of £282m for the March 2018 year-end, leading to adjusted EPS of 68p, against £155m and 61.6p in FY2017.

 

RPC (RPC)
ORD PRICE:803pMARKET VALUE:£3.33bn
TOUCH:802-804p12-MONTH HIGH:1,032pLOW: 660p
DIVIDEND YIELD:3.0%PE RATIO:22
NET ASSET VALUE:439p*NET DEBT:58%

 

 

Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2013 †0.9848.216.612.0
2014 †1.0559.020.512.0
2015 †1.2267.118.013.3
2016 (restated)1.6475.618.116.0
20172.7515537.124.0
% change+68+105+105+50

Ex-div: 10 Aug

Payment: 1 Sep

*Includes intangible assets of £1.95m, or 471p a share. †Restated per share figures adjusted for Jan 2016 1-for-5 and Feb 2017 1-for-4 rights issues.