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Jury still out on RPC

The plastics group's cash generation will be a subject of interest to its prospective bidders
November 28, 2018

Discussions continue over a potential offer, but RPC Group (RPC) was back in acquisitive mode in the first half, albeit via "three small acquisitions", in the form of plastics manufacturer Spec Group, film manufacturer Nordfolien and - doubtless mindful of tightening EU environmental legislation - recycler PLASgran. That last deal augments the group's self-styled status as "one of Europe's leading recyclers", but it's understandable why RPC would want to push the recycling narrative, given that regulatory risk is only intensifying for the packaging sector. 

IC TIP: Hold at 753p

Growing public disquiet over plastic packaging is one issue, but the group has been subject to criticism over a previous acquisition spree, which critics, most notably Northern Trust Capital Markets, believed had effectively masked disappointing capital returns and free cash flows (FCF). And bearish sentiment lingers - the likes of BlackRock, Merian Global Investors and GLG Partners have taken short positions, according to FCA data. 

So, critics will have noted the 60-basis point reduction in return on capital employed, together with a 14 per cent decline in FCF at the half-year mark. Management pinned the blame on "foreign exchange translation losses and polymer price pass-through lag" for the faltering capital returns, while the fall in cash was ascribed to a seasonal working capital outflow, combined with higher interest and tax payments than the 2017 half-year. Sure, the group achieved organic growth of 3.2 per cent over the period, but RPC has struggled to convince critics over the underlying performance of some of its acquired assets, though management might argue that continued solid cash conversion points to a successful integration process.

The short positions may be waxing, but the balance sheet doesn't look appreciably different from a year earlier, with a rise in long-term borrowings offset by a reduction in defined pension obligations. And even though management attributed the decline in reported profits to increases in net finance costs, net debt remains equivalent to 2 times adjusted cash profits (ebitda), as per the covenant definition. 

Prior to the results, Bloomberg consensus gave revenues of £3.82bn for the March 2019 year-end, leading to adjusted EPS of 75.4p, rising to £3.98bn and 80.6p in FY2020.

RPC GROUP (RPC)   
ORD PRICE:753pMARKET VALUE:£ 3.1bn
TOUCH:752.8-753.4p12-MONTH HIGH:1,032pLOW: 642.4p
DIVIDEND YIELD:3.8%PE RATIO:12
NET ASSET VALUE:488p*NET DEBT:60%
Half-year to 30 SepTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20171.7716228.47.8
20181.8915428.98.1
% change+7-5+2+4
Ex-div:27 Dec   
Payment:25 Jan   
*Includes intangibles of £1.9bn, or 476p a share