Full year results at RPC were ahead of market expectations as it posted an operating profit for the year of £308.2m, an increase of 77%. The group announced a final dividend of 17.9p per share, resulting in a full year dividend of 24p, representing a 50% increase over the previous year.
The shares were initially up on the news, but then reversed course, to drop 3.5%.
RPC shares have fallen substantially since the company announced the acquisition of US packaging group Letica back in February.
The fall has been driven by concerns about the group's long running acquisition programme. These centre on the worry that it has failed to create value for shareholders and is masking a lacklustre operating performance since 'exceptional' integration expenses have proven anything but.
We think full year results go some way to answering those charges.
The substantial improvement in cash generation is notable and suggests that acquisitions are translating into a cash benefit for shareholders. That supports a 50% increase in the dividend, which remains well covered by earnings, and takes the group to 24 consecutive years of dividend increases.
Exceptional integration expenses do remain significant, at £84m this year they're up 23% on a year ago. However, acquisition costs were also 77% ahead of last year so we don't find this a great surprise.
In an industry where RPC's 3% a year organic growth is ahead of the market, acquisitions will inevitably remain a key part of the story going forward.
Historically, the group has funded acquisitions through share placings, which it might find difficult at the current share price. However, net debt is comfortably below the group's target level at present and improving cash flow increases the group's ability to fund smaller deals organically.
We remain upbeat about RPC's steady operating performance. While a substantial deal funded by equity could still rattle the market, and would be a cause for concern, we would see appropriate bolt-on deals as a positive.
The shares currently offer a prospective yield of 2.8%, although as ever with yield estimates this is variable and should not be viewed as a reliable indicator of future income.
Full year results
Acquisitions worth £1.2bn during the year supported significant revenue growth, up 67% to £2.7bn, with organic sales growth of 3%.
The packaging business (which accounts for over 85% of group revenues) saw a particularly strong performance in the key Food category, where like-for-like sales grew 5%. The division saw return on net operating assets increase 2.1 percentage points to 25.4%.
Non-packaging, which manufactures plastic components for industries including the automotive and medical devices sectors, generated sales of £381.9m. Return on operating assets improved 8 percentage points to 32.4%.
RPC delivered a significant improvement in cash generation over the year. Free cash flow rose 95% to £239m, with cash conversion (the ratio of free cash flow before interest and tax paid, to adjusted operating profit) rising to 95%.
The group remains committed to its Vision 2020 strategy, which calls for "selective consolidation of the European market through targeted acquisitions" as well as building a meaningful presence outside Europe. The group estimates that returns on acquisitions made since the launch of the strategy have been 12%.
The group now expects to deliver an extra EUR5m in synergies from recent acquisitions, taking the total to EUR105m. The integration of GCS and BPI is said to be progressing well, with synergy realisation activities nearing completion and more recent acquisitions bedding in well.
Net debt at year end stood at a little over £1bn, which equates to a net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio of 1.8 times.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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