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RPC - Steady growth with integration on track

Nicholas Hyett | 29 November 2017 | A A A
RPC - Steady growth with integration on track

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RPC Group plc Ordinary 5p Shares

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Acquisitions made in the previous financial year drove revenues to £1.9bn in the first half. This represents 45% growth at constant exchange rates (CER), with organic growth of 2%. Cost savings supported a 47% increase in adjusted operating profits to £214.7m.

The interim dividend rose 28% to 7.8p per share, with the shares rising 2% on the announcement.

Our view

Plastic packaging manufacturer RPC has been under pressure to prove its long-running acquisition programme is creating value for shareholders, and not masking a lacklustre operating performance.

That worry led to a sharp fall in share price earlier this year. At the time we felt the fall was more a crisis of confidence than change in the fundamentals. We're pleased to say recent results have given us further assurance the business remains solid.

Cash generation continues to improve. Dividend increases remains well covered by earnings, and take the group to 25 years of consecutive growth.

Although RPC's organic growth has historically been ahead of the market, in such a fragmented industry, acquisitions will inevitably form a key part of the long term growth story. Management decided put a hold on deals while it dealt with concerns about operating performance.

There's good news here. Exceptional integration expenses, an area of particular concern for sceptics, have fallen significantly. Cost savings are coming in, boosting margins, with the consolidation of the European business costing less than initially thought. Organic growth is perhaps a touch lower than we would have liked, but that's a relatively small concern.

However, it sounds like management are now champing at the bit as they look to get back on the acquisition trail. That's understandable, a halt on deals means near-term performance will likely be steady rather than exceptional, and buying back shares with spare cash freed up by the lack of acquisitions will only go so far.

So far the company has stuck to the one year deal moratorium, and given expansion has typically been funded by attracting new money from shareholders, restoring investor confidence is key. But we wouldn't be surprised to see deals very early in the next financial year.

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 2.8%, and trade on 13.2 times expected earnings.

Half Year Results (CER)

Packaging continues to account for the vast majority of sales, c. 85% of total. Returns in the division have improved, with a 43% improvement in sales driving a 52% increase in operating profits to £177.5m. Sales gains are being driven by acquisitions. Organic sales rose just 1%, as a strong performance in food was offset by flat year-on-year numbers from beverages and healthcare.

Non-packaging, 15% of revenues, saw margins decline following the acquisition of ESE and start-up costs associated with new contract awards - with a 56% uplift in sales lifting profits just 29%. Organic growth in the division was healthy at 3%.

Integration of last year's acquisitions is said to be progressing well. Cost savings are on track and implementation costs are lower than expected, with the closure of 22 European facilities nearing completion. Exceptional costs relating to these acquisitions were significantly lower at £6.5m (compared to £32.7m last year).

Free cash flow in the half rose 45% to £171.7m. Net debt rose slightly to £1.1bn (March 2017: £1bn), although improvements in profitability meant gearing and leverage ratios remained unchanged.

Having announced a share buyback of up to £100m in July, RPC has so far completed £20.5m of share purchases.

Nicholas Hyett holds shares in RPC.

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.

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.