RPC tackles headwinds

A sharp increase in raw material costs during the fourth quarter has failed to dent optimism at RPC or, indeed, full-year profits, which are still expected to come in on target.

That's impressive given that polymer prices, a key ingredient used in RPC's rigid plastic packaging, jumped 20 per cent between January and the end of March to near record levels. A tight grip on other costs and increasing shift towards higher margin coffee capsules, personal care products, pharmaceuticals and long shelf-life packaging, should limit the inevitable impact on margins during the final quarter. Remember, too, that polymer prices were much lower from June to December. Moreover, activity was "encouraging" over the three months, so, with the Superfos acquisition included and improving like-for-like performance, annual revenue will predictably be a good deal higher than last year. Costs savings from Superfos, which should be fully integrated by the end of June, and better margin business will boost underlying operating profit too.

Progress is also being made exiting the loss-making German vehicle parts business and vending cups operation in mainland Europe, which will likely cost £15m, offset by asset sales and release of working capital. A return on equity of 20 per cent by 2014 looks nailed on.

JP Morgan Cazenove says…

Overweight. The pre-close statement demonstrates RPC’s ability to manage variations in polymer prices effectively. The company passes on raw material price increases - about two-thirds of operating costs - within 3 to 4 months, minimising the impact on operating margins. Given tactical inventory management, positive shift in sales mix and lower polymer prices earlier in the year, we expect a slight increase in operating margins during the second half to 7.8 per cent. Despite its tangible prospects for generating long-term value for shareholders, RPC trades at a discount to key UK and international peers, which we believe is unwarranted. Our EPS estimate of 36.6p (year to March 2012) and price target of 433p are unchanged.

Panmure Gordon says…

Buy. RPC remains in good shape, with the building blocks in place for further growth and ongoing progress above and beyond the competition. We expect higher raw material prices to be passed on, though there is a short term additional cost. Still, given the size of the move in the last quarter, we believe RPC has done well to make this impact relatively small. We trim our March 2012 forecast from £81m to £79m, giving EPS of 36.7p. However, a current PE ratio of 10 falling to 9 in 2013 is too low, given the potential for further growth, its premium position and sound finances.