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RPC: high growth at a low price

Undervalued plastic packaging specialist RPC has a knack for buying growth at the right price
May 29, 2014

Things could get a bit messy without RPC Group (RPC). Its rigid plastic packaging houses everything from margarine and Ragu pasta sauce to Nivea sun lotion and hair care products for L'Oréal. Business is growing fast and a series of clever acquisitions could drive earnings up by 25 per cent next year. But with RPC's shares still trading at a big discount to peers, we feel the substantial benefits are yet to be priced in.

IC TIP: Buy at 610p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Buying fast-growing Chinese peer
  • Heavily oversubscribed placing
  • Earnings rising quickly
  • Results on 4 June to match estimates
Bear points
  • Weak euro
  • Execution risk

Management has always bought well. Since paying £205m for Danish company Superfos at the bottom of the market in 2010, underlying earnings per share has surged by more than a third and RPC's share price has doubled. Now, it has snapped up China's ACE Corporation, one of the Far East's biggest manufacturers of plastic injection moulded components and injection moulding tools, for £255m - £178m upfront and the rest on earn-out over four years.

ACE has been around for 25 years and is clearly very good at what it does. As well as traditional plastic packaging, it makes remote control car keys, engine parts, waterproof iPhone cases, syringes, golf tees and power switches. Half the business is home accessories and consumer electronics work for giants such as Philips, Unilever and P&G, and a fifth is automotive, both fast-growing sectors. And a multiple of 7.4 times cash profit on the initial consideration looks fair for the growth on offer.

RPC (RPC)

ORD PRICE:610pMARKET VALUE:£1.1bn
TOUCH:610-611p12-MONTH HIGH:653pLOW: 391p
FORWARD DIVIDEND YIELD:3%FORWARD PE RATIO:13
NET ASSET VALUE:142p*NET DEBT: 65%
*Includes intangible assets of £98.6m, or 55p a share 

Year to 31 DecTurnover (£bn)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
20110.85329.911.5
20121.18037.314.4
20131.17634.814.9
2014**1.18337.815.7
2015**1.211347.218.1
% change+16+36+25+15

Normal market size: 3,000

Matched bargain trading

Beta: 0.6

**JPMorgan Cazenove estimates, adjusted PTP and EPS figures

Annual savings should reach £1m and RPC's blue-chip customer base is already opening doors for ACE. Organic operating profit has rocketed from just HK$94m (£7.2m) in 2011 to HK$245m last year on revenue up from under £58m three years ago to £104m in 2013. And both growth and margins have accelerated every year. First-quarter sales were "materially higher", too, although lower demand from the US motor industry due to bad weather and launch costs for a new iPad Air product meant profitability was flat.

But those issues are one-offs, and demand, especially in Asia, is high. More rigid plastic containers are used there than anywhere else - about 30 per cent of global volumes - and consultancy Pira International forecasts a compound annual growth rate (CAGR) of about 10 per cent for the five years to 2018. And ACE management is obviously comfortable signing up to that earn-out which demands cash profit CAGR of at least 15.6 per cent out to 2017, weighted to year four.

ACE does 30 per cent of its business in China, 38 per cent across the Americas and 13 per cent elsewhere. Less than a fifth of sales are to Europe. RPC already makes two-thirds of profits in euros and translating that into sterling hits earnings, which is why RPC wants to build a big presence elsewhere. Since launching its Vision 2020 plan last November, it has paid £103m for UK-based Maynard & Harris (M&H), which has a growing US business, and bought a Bosnian company called Helioplast with sales in eastern Europe. Both will boost earnings this year. (Global growth should be double the rate in Europe, says Pira.)