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RPC - Organic growth a touch disappointing

Nicholas Hyett | 18 July 2018 | A A A
RPC - Organic growth a touch disappointing

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RPC Group plc Ordinary 5p Shares

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First quarter revenue rose 5.8% year-on-year, benefitting from the contribution of acquisitions, polymer prices and organic growth. Profitability has improved on last year and is in line with management expectations.

The shares fell 2.5% following the announcement.

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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. Management have put a hold on acquisitions while it deals with those concerns.

So far, we think the results are good. Organic growth is healthy and exceptional integration costs, the focus of much of the investor discontent, are falling. From an operating perspective the company looks healthy, and the group looks set to maintain its 25-year track record of dividend growth.

Unfortunately the share price hasn't reflected the improvement. That's partly because RPC is facing new pressures. This time from regulation.

Following the airing of 'Blue Planet', the UK government has faced calls to tighten up rules on plastic waste. The EU has followed suit, and is already tightening controls.

RPC argues that it's well placed to weather the political turbulence, and could even benefit.

The group is Europe's leading recycler of polyethylene film and the majority of its products are recyclable. Its focus on innovation should mean it can respond quickly to demands for more easily recyclable products. Its innovation centres are actively researching renewable polymers and compostable materials that break down completely when treated correctly at the end of their life.

We think RPC's scale and focus on innovation are significant advantages. Plastics are a key weapon in fighting other environmental concerns like carbon emissions and food waste, and RPC is well-placed to benefit from consolidation within the sector as well as increased demand. However, it's unlikely the group would escape a crackdown on plastic completely unscathed.

A bigger problem in our view is the effect of the headwinds on RPC's ability to make new acquisitions. A subdued share price - the shares trade on a price to earnings ratio of 9.9, well below their longer-term average - mean using its own shares to fund future deals is expensive, while investors seem uncomfortable about debt levels. If the group can't buy smaller rivals investors are left with just an unexceptional organic growth rate.

The shares offer a prospective yield of 4%, so at least investors are being paid to wait for a recovery. But with the public mood firmly against plastics at the moment, sentiment may need to improve before things change. How long that will take is anyone's guess.

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Trading details

First quarter revenues of £964.7m benefited from organic growth of 2%. As well as improved profits, cash flow has developed in line with management expectations and continues to benefit from previous projects.

Progress on the disposal of non-core businesses is said to be good, although the European Automotive business continues to suffer from cost inefficiencies. The Nordenfolien deal completed in April, with integration now underway.

Chairman Jamie Pike said "pressure on the company's market valuation and differing investor views on the appropriate level of leverage is constraining the Group's ability to pursue some attractive opportunities for growth and your Board is working to resolve this."

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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.

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.