"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 largely 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. As a result cash generation is catching up with headline profits. From an operations perspective the company looks healthy, and the group looks set to maintain its 25-year track record of dividend growth.
But RPC is facing new pressures. This time in the form of regulation.
Following the airing of popular TV show 'Blue Planet', the UK government has faced calls to tighten up rules on plastic waste. The EU has followed suit, and is already looking at stricter controls.
However, 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 demand for more easily recyclable products with minimal environmental impact.
We tend to agree that RPC's scale and focus on innovation are significant advantages. Plastics remain a key weapon in fighting that other environmental bogie man, carbon emissions, and RPC is well placed to benefit from the consolidation the sector as well as increased demand.
However, while we remain upbeat about RPC's prospects, it's unlikely it would escape a crackdown on plastic completely unscathed.
The shares currently offer a prospective yield of 3.8%, and trade on 10.2 times expected earnings, slightly below their longer-term average."
TU pretty much in line with previous positive noises,
Lots of stress on how environmental their operations and products are, and looking forward to positive discussions with UK Government about deposit return scheme. I'll bet they are.
SP up over 1% at open, let's hope it can keep going.
"The positive trading trends outlined in the third quarter update have continued, and revenue for the full year is expected to have grown significantly versus last year, driven by organic growth and aided by acquisitions, polymer price and foreign exchange tailwinds.
Profitability and cash generation (both before and after exceptional items) are expected to be in-line with management expectations. The Group's financial position remains robust with good cash flow development and significant headroom in its debt facilities.
it's hard to know what RPC can achieve to make markets like them, but if they keep increasing sales, earnings and dividends, I'm happy & at some stage the fundamentals will bring the sp into line.
I wouldn't worry too much about the effect of buy backs. In the short term they tend not to have a great affect (but of course the lower the price at which the buy backs take place the better the long term effect.) RPC has actually out performed the FTSE AS over the last 2 months (see graph) so although it appears to keep going down, it's only in line with overall market sentiment.
TU due 29th, I see last year's issued on 30th March 17 was positive, but see the SP fell around 100p from 29th to 31st then recovered upto the results on 7th June which again were very good-
"Adjusted operating profit up 77% at £308.2m (2016: £174.3m) and adjusted EPS improved 54% to 62.2p (2016 restated: 40.4p) with the statutory basic earnings per share more than doubling."
Naturally the SP tanked again before recovering (stock specific not a general market selloff as FTSE shows).
We are starting from a lower SP, the valuation metrics are 'cheaper' so hard to know the pattern will recur. Of course a negative TU would be a real blow but nothing from the Co to suggest any issues. Fx may affect a little but rate Vs Euro has been much steadier than against the weak dollar so if anything I'd expect raw material costs (generally prices set by USD) to be lower and products (mainly in GBP and Euro) steady.
US Tax changes may impact either way but only small part of the business.
Hard to predict market reaction, but reassuring thing to note is drops were recovered quickly on both events in 2017.
"Revenues for the financial year 2016/2017 are anticipated to be significantly ahead of last year, reflecting contributions from acquisitions and continued underlying organic growth. The Group's overall performance has been encouraging with the adjusted operating profit for the year ahead of management expectations.
The Group's financial position remains robust with good cash flow development.
Not a huge acquisition (75 m) compared to previous deals, SP down very slightly on a down day suggests market is not concerned.
Interesting that it is in Europe which RPC already have 75% of business and is lower growth than other regions (eg Asia) but Polish plant gives access to higher growth Eastern Europe and integration with bpi gives savings. Important in current climate that they have in-house recycling facilities.
7x EBITDA pre-synergy, RPC well experienced in finding synergy benefits. Expect earnings enhancing in first year.
The SP has been on the up for last couple of weeks after a long decline, it could use some encouragement.
"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. As a result cash generation catching up with headline profits. From an operations perspective the company looks healthy, and the group looks set to maintain its 25-year track record of dividend growth.
But RPC is facing new pressures. This time from of regulation.
Following the airing of popular TV show 'Blue Planet', the UK government has faced calls to tighten up rules on plastic waste. The EU has followed suit, and is already looking at 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 demand for more easily recyclable products. Innovation centres are reportedly actively researching bio-based polymers and compostable materials that break down completely when treated correctly at the end of their life.
We tend to agree that RPC's scale and focus on innovation are significant advantages. However, it's unlikely the group would escape a crackdown on plastic completely unscathed.
Nonetheless we remain upbeat about RPC's prospects. Plastics remain a key weapon in fighting that other environmental bogie man, carbon emissions, and RPC is well placed to benefit from the consolidation the sector as well as increased demand.
The shares currently offer a prospective yield of 3.4%, and trade on 11.3 times expected earnings, slightly above their longer-term average."
Hard to see what the market doesn't like in today's update to give near 5% drop.
Unusually, RPC will see a $10m positive impact this year due to tax change (most Co's are showing negative impact in Y1, positive thereafter)
Other guidance all seems pretty positive. RPC's strength in recycling/bio-degradeables should mitigate Govt action.
Revenue for quarter ended 31 Dec 17 was £898m, 31% growth versus Q3 16
benefitted from acquisitions, polymer price tailwinds and organic growth of over 4%.
Year to date organic growth rate was 2.6%.
Profitability in line with management expectations and grew significantly versus the prior year, aided by organic growth and the further realisation of synergies which offset an adverse polymer time lag impact.
Cash generation in line with management expectations and the Group maintains a robust financial position.
For the year to 31 March 2018 it is currently expected that the US reforms will have a small positive impact on the Group's adjusted effective tax rate, with a one-off non-cash tax credit of c.£10m resulting from the revaluation of US related deferred tax assets and liabilities.
For the year to 31 March 2019 it is currently expected that the changes will reduce the Group's adjusted effective tax rate by approximately 1%, based on the existing mix of profits.
But maybe a time to buy @ 770p rather than sell ? Depends how long you can tie your money up. Long-Term, Plastics won't be disappearing as long as they are biodegradeable and recyclable, etc... Consumers aren't on any mass scale going to start keeping every plastic container that might be useful for holding things in, like in the old days, so a lot of this political talk is to get all to be more responsible about manufacture and disposal (into recyclable areas rather than into the sea). RPC are very advanced on responsible treatment of plastics. But as always this is just my opinion and do your own research !
I feel rather lucky. A week before Xmas I bailed at 871p, taking a decent profit (18% IRR) and forgot about RPC. I take a quick look today and they're 770p. With volatility i.e. risk like that, I'm glad to be out. Weird.
"Berenberg still has a 920p price target (15% above current price) even though they cut today their target from 1120p !"
Interestingly 4-Traders indicate targets from 9 brokers, ranging from 1120p to 1250p mean 1182, so it looks like Berenberg were already the low-ballers and have now dropped further to 920p. RPC SP has been drifting further below mean target since early last year.
I tend to pay more attention to EPS forecasts than SP targets, I see that the 2017 forecast was raised from 52p to 55p in December (2018 number also raised). On current EPS forecasts, RPC looks significantly undervalued, but of course the current anti plastics campaign could lead to some changes by Govts, customers and/or public which impact the forward business and cut future growth rates. It would seem any regs etc would take some time to implement, but even the threat is impacting SP.
The current price now looks to be at the long term support, a further drop would be ominous!
Berenberg still has a 920p price target (15% above current price) even though they cut today their target from 1120p !! Plastics of RPC standards will still be needed in very large quantities. We're not going back to the glass milk bottle !!
Plastics have differing and ubiquitous uses many are indispensable to modern life and arent going to go away!
See www.bpf.co.uk for the industry view.
The Capital Markets day slides on Innovation in rigid plastic packaging show some of the newer ideas where RPC are ahead.
Plastics waste reduction and recycling is likely to benefit RPC and they are contributing to biodegradeable materials R&D. From 2017 AR we are working with external organisations such as INCPEN, EUPC, The Ellen McArthur Foundation and RECOUP on areas such as circular design principles, litter reduction and the recycling of plastic.
Reclamation of any material for re-use or recycling involves collection, sorting and processing. The trouble with plastic waste is the variety of types and the incorporation of other materials which makes separation more difficult.
R4 Today prog. had a piece Thursday 11th Jan around 730am about plastics recycling with Ian Jamie, manager at Staeger clear plastics and Ellen MCArthur of www.newplasticseconomy.org She quoted only 2% of 78M tons of plastic being recycled to comparable quality products. Staeger apparently supply M&S and have been using 60%plus recycled materials for over 10years.
A lot of plastic that could be recycled isnt even collected but goes to incineration or landfill. I have read that some local authorities have invested in incinerators which require diversion of large volumes of recyclable materials to maintain viability.
There are several initiatives to improve recycling/reuse of plastics eg www.wrap.co.uk and www.ellenmacarthurfoundation.org
An FT letter recently from some Oxford Chemists www.ft.com/content/ebe0f5d0-e3f4-11e7-97e2-916d4fbac0da said we have discovered a new and non energy intensive catalytic chemical recycling process to be developed on an industrial scale.
I did have an indirect investment in the Closed Loop Recycling plant in Dagenham which did recycle HDPE bottles successfully from 2008 until the drop in oil price made recycled feedstock more expensive than virgin polymer. Closed Loop went into administration, was sold to Middle East investors who then shut it and sold it on to Veolia.
There may be a push to return to glass or metal containers but these go against convenience demands, light-weighting and they increase transport bulk and fuel costs.
As others have mentioned, the cardboard manufacturers have more integral recycling capability but overall, plastics manufacturing needs to engineer a more 'circular' solution .
Meanwhile, the only plastic free aisle Ill be visiting is the one with the glass wine bottles, though even here its more screw top than cork.
I heard it on the radio, so it must be true...
Jeremy Vine had the head of UK recycling association or somesuch on the other day.
I think it's that it's difficult to recycle because it is either too small to be sorted by the machines and is low quality - I gather there's a lot more to plastic than the man in the street might think.
I agree that local use of things like food containers is likely to be locally produced, but it's all the small nicknacks and excess packaging on everything made in China - toys, gadgets, household goods, tools etc etc that comes from China. They supply the world with this sort of stuff, we just buy our chicken pieces etc in supermarket packaging rather than loose from the butcher. (I know that's a generalisation.)
We should all use less packaging - except that made by RPC obviously.
Amcor, a Swiss-based Australian (and Aus listed) rigid plastics manufacturer, doesn't seem to have anything much over RPC but the share price hasn't taken a pasting, so perhaps it's just UK stocks being beaten up over the issue.
SMDS (recycled paper packaging) is slightly down in the dumps, but not as much as RPC.
Take your word on the low quality stuff fastback. Ergo it costs too much to recycle?
Not sure either the balance of what China sends versus takes? Strikes me vast majority of packaging is local produce & use? Even if it is the case it will be specified by the consumer so still the West's issue.
Anyway, digress. Are RPC doing any less well than the competition?
I very much appreciate all the excellent comments on this subject. I think I've convinced my self that the bad press will see some changes to the world of plastic packaging, and in the short term will affect the RPC share price, but should not affect their business too greatly in deed it may create additional opportunities, so I am looking to add to my holding, but I will wait till this share price weakness had bottomed out.
Plastic is a hot topic and getting a bad press - some of which is deserved, but not all.
China won't accept our plastic for recycling anymore because what we sent there was the stuff that's difficult to recycle. But they sent most of it to us in the first place as packaging - and it is this low quality rubbish that is the problem.
RPC doesn't make most of the 'problem plastic' - it makes lots of durable, reusable, recyclable or even biodegradable products (the coffee pods). Water bottle caps are probably their 'naughtiest' product.
I can't see the world going back to metal toothpaste tubes and glass containers in a big way. They are even more energy intensive (I think - correct me if wrong) to manufacture than plastics.
Are politicians really going to ban single use bottles? Water bottles get all the flak, but can you see a return to glass milk/squash bottles etc being a vote winner?
As consumers we need to take more responsibility for our waste and as a nation we should ensure we minimise waste and recycle as much as possible - but that isn't going to stop the developing world from dumping lots of plastic in the sea.
I am not adding more RPC as I already have a full allocation (although I am re-investing the divs) and as things stand am not planning on selling either.
H2 & Dutch, many thanks for your replies - I think we're thinking along the same lines. This is a good business, undervalued at the moment; but it could be undermined very quickly by ill informed politicians in response to a media circus.
Every broker has it as but or strong buy, and when someone like David Buik singles it out as his share for the year, it really does have things going for it.
I'm tempted to buy more at the current prices, but think I'll hold off to see if the share price descent shows some sign of levelling off.
And if I was panicking, CI, I wouldn't have bothered posting, I'd just have pressed the sell button.
I am also a little concerned by the continued fall, it seems likely that the current focus on plastics in the sea is contributing to the worry, whether any Government measures would have a big effect on RPC or not. The issue is broader than sea pollution, given the issues of landfill and exporting waste (to China in particular which the Chinese Govt are taking steps to stop).
Looking at the 5yr chart (hopefully attached below), it is maybe not so surprising that there is such a fall following the recovery from the lows of early 2017 in the wake of the RI.
If the SP drops through the resistance around 775p it would be a big concern. I would think it will turn before then based on the forecast earnings which suggest a valuation of 1000-1100. That could change is forecasts start to be revised down to reflect worries about growth and regulations, although the mean EPS estimates for 2017 and 18 were actually slightly raised in December.
The public see pictures of all the plastic in the sea, and today's article in the D Tel showing a large increase in plastic washed up in Cornwall following the recent storms just adds to the overall picture. Yet If you walk along by the Thames or any other river you don't see tons of plastic waste. The UK is good at re-cycling or burying for good....... or, and here's the rub, exporting the contents of your re-cycling bin to China or India where they aren't so good at re-cycling or burying it. So maybe the stats showing that Europe is only responsible for 2% of the plastic waste in the sea is a tad misleading.
As for the effect on RPC, I'm sure that the uncertain atmosphere all this has created is causing manufacturers of drinks, juices, foodstuffs, toiletries etc to hold back on redesigning their plastic packaging when they may have to move towards other packaging --- which I doubt is even possible in many cases.
If I didn't already have a significant part of my portfolio invested in RPC I would be thinking of buying now, but as it is I'm thinking "how much pain can I take?"
You seem to be panicking. People need plastic packaging - what else will they use ? Paper ? Cardboard ?, Glass ? Metal ? Plastic packaging is the most efficient. Why would the electorate vote for an effective abolition of such packaging, they can't be that stupid ? If politicians want to really sort out the pollution, etc..then motor vehicles / planes / trains, etc..need to be abolished and we'll all go back to the horse and cart. RPC and other plastic packaging manufacturers have a strong input into solutions also. They employ a lot of people. How are the cigarette manufacturers doing after years and years of cancer warnings ?!!
As the price has continued its general weakness I have been getting concerned about the plastic pollution problem; especially in the sea with all the recent publicity after the Attenborough documentaries.
Looking on the RPC website is very reassuring they have a whole area devoted to sustainability with all sorts of statistics and details about what RPC are doing. This is very reassuring as far as they are on top of the problem, as much as anyone is, and they are not causing too much of it. I think they said the plastics in the sea problem is about 2% attributable to Europe which is where over 85% of the RPC business is; so on the face of it there should not be too much to worry about; and they are working as hard as anyone on trying to find solutions. (Much bigger problems in the UK is chewing gum - I'm all for banning that!)
However the problem is Politicians who want to garner public opinion without really knowing what they are doing. (They'd rather spend a lot of time talking about the merits of putting 5p on a cup of take away coffee than sorting out national defence budget; or let 2 huge businesses know one way or another if an agreed take over can go ahead.) Ed Milliband effectively destroyed the UK coal industry when he was Secretary of State for energy and environment; without knowing how far the industry had got on reducing emissions from coal fired power stations; and this recent clamp down on diesel cars without giving the engine makers time to develop less particulate & nitrous compound emitting engines. I gather CO2 levels in London have already increased as drivers switch from diesel back to petrol. These political decisions are popular vote winners, not necessarily the right thing to do; and I fear this could happen with plastic packaging.
So my brain says RPC is a good investment. They are well managed, have a successful growth record and are predicting further successful growth; and any threat to the business caused by legislation to reduce plastic pollution can be dealt with by RPC and the recent price weakness is a buying opportunity. However the threat of politicians (in all countries - I envisage a domino effect) introducing legislation which will be popular with the electorate, but may not achieve any difference in reality, could almost destroy the business. So I'm torn between buying more or selling the lot.
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The chinese plastic waste ban has highlighted what's really happenning to our re-cycling efforts. Did I read that as much as 50% of our re-cycled waste ends up being shipped to China, well I suppose the real cost of shipping it is very low indeed as the ships and containers need to get back there in order to ship over the next consignments of manufactured goods.
I'm sure it will have an impact on investment plans in this country, but what's the alternative ? In theory plastic milk bottles can be re-cycled into new ones, but it clearly hasn't been happening on anything like the scale required. What's the alternative for most of the plastic containers made by RPC? Metal, is that really any better? Cardboard? it's compostible but I cant see many cosmetics tubes or oil being in cardboard unless plastic coated which makes the problem even worse.
I bought in August to October and have seen price drop which is a bit of a concern but after the rise from 720 in June, some retracement is perhaps not too surprising.
The forecast adjusted EPS from Digital Look for end March 2018 and 2019 are 70.15p and 75.72p against 62.20p this year. 2018 PE 12.7
The 4T undjusted numbers 18/19/20 are 54.6p, 69p and 72.3p vs 37.1 this year. 2018 PE 15.9
The forecast 2018 EPS number have been increased on both sites in the last few weeks.
Worries about whether the costs provisions and other consequences of acquisition is masking poor performance is often a worry for companies which make numerous acquisitions. Here it is core to the business strategy and so unavoidable. AHT SP was pushed down with similar concerns being raised but have proved the doubters very wrong. I cannot be sure about RPC but will hold and watch developments. A rights issue would likely give another hit.
On the regulations affecting plastics, that remains a concern, particularly in Europe which is waking up to the issue, how big an impact and how soon remains to be seen it could cause accelerated consolidation in the market and maybe benefit RPC.
Share the concerns, but RPC has delivered very well in terms of bottom line. (Share price is a different thing based on market's fear & greed) As long as they continue to increase profits and dividends, we shareholders should have no complaints.
As to where to invest: interesting question. This time of year all the "experts" come out with their predictions for the year ahead, and their tips. Most I have read are confused. They all seem to worry that the equity bull market has been running so long a fall back is inevitable; but they also feel the fundamentals continue to support continuing growth.
As always there are good opportunities to be found. Good luck!
Yes this is a worry - indeed the SP performance of this share ( one of my very largest holdings!) is worrying. Despite good results, increasing Divi's and an ongoing share buyback programme the SP keeps falling. It is now about 100p lower than the theoretical ex rights share price at the time of the last rights issue about a year ago. Therein lies another problem I think: the company has had large acquisitions financed by rights issues at yearly intervals for the past 3 or 4 years. After criticism they said they would not make any further large acquisition sin 2017, well obviously that self imposed standstill is about to expire, so I think that some are concerned about another rights issue in January or February which will act as areal drag on the SP. I for one will not invest more money here as it's too large a part of my portfolio already and not performing for me!
But where to invest ?? I will shorty get my hands on a sizeable pension transfer pot and so will need to be more in than out of the market.
Are the current share price drops because of worries over possible extra plastic recycling costs being recommended by an MP Committee after the relevant UN committee said that governments need to make Packaging Manufacturers more responsible, etc...??? If the latter incur extra costs then surely it will be passed on to all consumers somehow......!!
I got a little bored with this and with the risk that the accounts are being fudged or further acquisitions will increase the risk profile I took my 10.3 % profit (an IRR of over 18%) and sold today at 871p. Not bad in just over 8 months but not as exciting as I had hoped. Good luck all who remain.
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