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RPC - Steady as she goes

Nicholas Hyett | 3 April 2017 | A A A
RPC - Steady as she goes

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RPC Group plc Ordinary 5p Shares

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RPC has issued a brief trading update for the year to 31 March 2017, ahead of full year results due on 7 June. Revenues are expected to be significantly ahead of last year, supported by both acquisitions and organic growth, with operating profits ahead of management expectations.

The group's larger acquisitions from last year, GCS and BPI, are reported to be integrating well, with performance ahead of expectations. The acquisitions of ESE and Letica have both completed with integration under way.

The shares rose 2% on the news.

Our View

RPC is one of Europe's leading manufacturers of rigid plastic packaging - think yoghurt pots, shampoo bottles etc. Glamorous it isn't, but the group has been able to increase its dividend every year since 1995, though there are of course no guarantees this impressive record will be maintained.

Its strategy of targeting higher-margin, more resilient consumer goods packaging has helped it grow margins from 4.6% in 2009 to 10% in 2016. That's despite economic turmoil in its core European markets, where it would be well-placed to benefit from any turnaround.

The plastic packaging industry is fragmented, with RPC commanding just 6% of the European market. The group has sought to grow by snapping up smaller competitors to supplement its steady organic growth, and has recently started to make acquisitions outside its European home market.

The recent Letica deal is the group' first major foray into North America, with an acquisition multiple above what RPC has paid for other businesses. However, management have a good record of taking costs out of acquired businesses, not least through increased polymer (raw plastic) buying power (an option which should be available here despite the lack of geographical overlap). It's worth bearing in mind though that all acquisitions come with risks, especially when they're large and outside a company's normal comfort zone.

Away from M&A, the group has benefited from the growing popularity of plastic packaging, delivering low but steady organic growth. Compared to alternatives such as metal and glass, it offers cost and weight savings as well as design flexibility. Design matters to RPC, with the group priding itself on offering complex solutions for clients (and charging a premium in return).

The shares have enjoyed a strong run of late, and currently trade on a price to earnings (PE) ratio of 13 times expected earnings, with a prospective yield of 2.7%.

Letica acquisition and third quarter trading update

Letica has 13 manufacturing facilities in North America with approximately 1.7m sq.ft. of manufacturing and warehouse space. The deal is expected to more than double RPC's North American revenues and polymer purchases.

RPC believe that the acquisition will deliver more than $5m per annum in ongoing cost synergies, with a further $12m of incremental cost savings identified within Letica. The deal is expected to enhance earnings per share in the first full year financial year post completion.

The Letica acquisition consists of an initial payment of £391m and subsequent payments of up to £120m, subject to Letica hitting earnings targets in the first two years after the deal completes. The upfront cost represents an acquisition multiple of 8.5 times Letica's 2016 EBITDA, but falls to 6.4 times if the full targets are met.

The rights issue to fund the deal is fully underwritten and will raise approximately £540m after expenses, with surplus funds being used to repay debt.

The author holds shares in RPC Group.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.