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RPC: check the cash flows, not the margins

The packaging group is still in the process of integrating acquired assets, but look at those cash flows
November 29, 2017

It’s nearly nine months since Northern Trust Capital Markets cast doubt on RPC’s (RPC) underlying performance. The investment house suggested an acquisition spree, involving the integration of some lower-margin, underperforming assets, had not only served to mask disappointing capital returns, but could even have exacerbated them. Ostensibly, these latest statutory figures suggest the plastic packager's buy-and-build strategy may have been vindicated, although RPC now comprises so many moving parts it’s best to avoid easy assumptions.

IC TIP: Buy at 1000p

After completing 10 acquisitions in just over a year, management was tasked with building margins in certain acquired assets, while driving through anticipated cost savings. None of this was achievable overnight, so even though management confirmed “integration activities” are progressing well, “synergy realisation continues”.

Another criticism levelled by Northern Trust centred on accounting treatment, specifically RPC’s interpretation of performance metrics. But we think it’s harder to dig into these figures simply because several of the group’s operating segments “meet the aggregation criteria set out in IFRS 8”, hence insufficient granularity for our tastes. Nonetheless, a 30-basis point improvement in the adjusted operating margin to 11.4 per cent suggests that synergies are, indeed, being realised, until you factor in a lowly £6.5m in exceptional operating costs, set against a corresponding figure of £32.7m in the 2016 half-year report. Polymer prices, a major input variable, were on the rise, although relatively stable overall. We don’t anticipate any problems linked to a substantial lag on passing price increases through to customers.  

The acquired assets contributed to a 45 per cent hike in the top line at constant currencies, although the underlying organic growth rate came in at a more prosaic 2 per cent. Management pointed to strong growth in the food/personal care packaging and technical components markets, while Europe and China impressed from a geographic perspective. Not so the US, where trading was constricted by the disruptive effect of hurricanes on the supply chain.

Jefferies has increased its adjusted pre-tax guidance for the March 2018 year-end by £20m to £382m, leading to EPS of 70p, against £286m and 62.2p in FY2017.

RPC (RPC)    
ORD PRICE:1,000pMARKET VALUE:£4.13bn
TOUCH:1,000-1,001p12-MONTH HIGH:1,032pLOW: 715p
DIVIDEND YIELD:2.6%PE RATIO:19
NET ASSET VALUE:451p*NET DEBT:57%
Half-year toTurnover   Pre-taxEarnings perDividend
30 Sep (£bn) profit (£m)share (p) per share (p)
20161.2372.515.26.1
20171.8816629.57.8
% change+53+129+94+28
Ex-div:28 Dec   
Payment:26 Jan   
*Includes intangible assets of £1.95bn, or 472p a share