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RPC - Apollo deadline extended, Bain walk away

Nicholas Hyett | 3 December 2018 | A A A
RPC - Apollo deadline extended, Bain walk away

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RPC Group plc Ordinary 5p Shares

Sell: 642.60 | Buy: 643.00 | Change 0.40 (0.06%)
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On 28 November 2018, RPC announced half year sales rose 7% to £1.9bn, with organic growth of 3.2%. However currency headwinds and higher raw plastic prices meant underlying operating profit rose just 3% to £214.3m.

The interim dividend increased 4% to 8.1p per share.

Update - On 3 December RPC announced that Bain Capital had walked away from takeover talks with the company, but the deadline for an agreement with Apollo has been extended to 21 December.

The shares fell 3.7% in early trading.

View the latest share price and how to deal

Our view

Plastic packaging manufacturer RPC has been under pressure to prove its long-running acquisition programme is creating value for shareholders, and not just masking a lacklustre operating performance. Management have put a hold on major 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 investor discontent, are falling. From an operating perspective the company looks healthy, and the group looks set to maintain its 26-year track record of dividend growth.

Unfortunately the share price hasn't reflected the improvement.

But a low share price has attracted interest from private equity buyers. Although one potential acquirer has subsequently walked away, Apollo are now entering a fourth month of talks.

Of course it's entirely possible that a bid won't ever be forthcoming, since 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 taking steps to increase controls.

RPC argues 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, and it's also investigating renewable and compostable materials.

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.

A bigger problem in our view is RPC's ability to make new acquisitions. A subdued share price - the shares trade on a price to earnings ratio of 9.1, well below their longer-term average - means 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.

That's not a concern for private equity groups like Apollo though - who have cash to spare and could fund a buying spree if they see opportunity beyond the short term headwinds.

For now investors are being offered a prospective yield of 4.5% next year, but until the Apollo situation wraps itself up, things are a little on hold.

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Half Year Results - 28 November 2018

The Packaging business saw revenues jump 7% to £1.6bn, driven by particularly good results in the Personal Care and Healthcare markets. Divisional profits rose 3% to £175.6m, as a delay in passing through higher polymer prices and changes in sales mix dented margins.

The non-packaging business saw revenue rise 9% at constant currency to £272m, with underlying operating profits up 5% to £38.7m. With the recently acquired ESE business performing notably well.

Free cash flow fell 14% to £142.9m, as increased investment, higher borrowing costs and a small working capital outflow all impacted results. As a result net debt increased 4% to £1.2bn, equivalent to two times EBITDA (earnings before interest, tax, depreciation and amortisation).

During the half RPC sold the Letica Foodservice business for $95m, realising a profit of £19.2m, as it looks to dispose of non-core businesses that generate £209m in revenue. Acquisitions in the period include UK plastic recycler PLASgran, polythene film manufacturer Nordfolien and South African packager Spec group.

The group completed its £100m share buyback during the half.

Find out more about RPC shares including how to invest

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 disclosure for more information.