RPC saw revenues grow to £960m in the first quarter, well ahead of the corresponding period last year, with profitability ahead of expectations. The group also announced a share buyback of up to &100m.
The shares rose 5.6% following the announcement.
Plastic packaging manufacturer RPC has recently been under pressure to prove that its long running acquisition programme is creating value for shareholders and not masking a lacklustre operating performance.
We think full year results went some way to answering those charges.
We saw a substantial improvement in cash generation, suggesting deals are translating into a cash benefit for shareholders. That supported 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 are still significant, at £84m last year they're up 23% on a year before. However, acquisition costs were also 77% ahead 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 form a key part of the long term growth story. However, the group is planning to take a breather from what has been a frantic buying spree of late.
This seems sensible. In our view, much of the recent share price fall stems from a crisis of confidence rather than changes in the fundamentals, so restoring confidence should be a key priority. While this means near-term performance will likely be steady rather than exceptional, taking the foot off the gas should allow RPC to demonstrate that its acquisitions are adding value, and put fears to rest.
The decision to use the cash freed up by the lack of acquisitions to fund a share buyback will be welcomed by shareholders - although it seems unlikely that a capital raise quickly followed by capital return was the original plan!
Overall, we remain upbeat about RPC's prospects. Its consumer goods customers are economically resilient and plastic is steadily replacing metal, glass and paper as the packaging material of choice.
The shares offer a prospective yield of 3.1% , and trade on 12.1 times expected earnings.
Q1 Trading Update
Revenue growth in the quarter has been driven by continued organic growth, the contribution from acquisitions and positive currency movements. Favourable foreign exchange conditions have helped offset the time lag in passing higher polymer prices onto customers and supported a better than expected margin. Cash flow development, both before and after exceptional items, remains on course.
The integration of US packaging business Letica remains on track. However, the group is not expecting to carry out any further significant M&A activity this year, as management look to bed down recent acquisitions. The board is also carrying out a review of its remuneration criteria, with a view to increase emphasis on returns on capital and cash flow generation.
The group also announced a share buyback of up to &100m, reflecting the board's belief that "the current share price significantly undervalues the performance to date and the Group's future prospects."
The author holds shares in RPC group.
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