Under-promise and over-deliver. That is the way to keep this market happy and avoid nasty surprises. When companies announce a deal, they tend to give an idea of the synergies that can be achieved from crunching the businesses together.
It is a fair bet that those numbers will turn out to be an underestimate. RPC, whose anonymous name stands for rigid plastic containers, bought Promens, which originated in Iceland, in November and indicated cost savings of €15 million a year available, mainly from closing plants in areas of Europe where they overlap.
Lo and behold, those savings have just been increased to €30 million in the figures for the year to the end of March. This is important, because part of RPC’s appeal is its ability to carry out acquisitions in the packaging industry, which is still highly fragmented. Promens was the fourth in recent years, but others will follow.
I have tipped the shares before, and the figures give an idea why. RPC is one of those consolidators that grind out ever higher revenues and improved margins, helped by those acquisitions. The return on sales rose from 9.6 per cent to 10.8 per cent during the year, as the company focused on more specialist packaging such as for cosmetics, pharmaceuticals and coffee capsules.
Revenues were ahead by 17 per cent, reflecting those acquisitions and underlying growth of 4 per cent — the British DIY market, where RPC supplies paint containers, proving to be especially strong. Pre-tax profits came in up by a third to £119 million and the dividend is hiked by 12 per cent, although the yield is only 2.4 per cent.
The effects of foreign exchange movements and cheaper polymer prices just about cancelled each other out. Forex remains a drag, thanks to the weakened euro, while those prices have risen significantly, by 50 per cent this year.
These will be passed on to customers in due course, but both factors meant that analysts were not much inclined to raise their forecasts. The shares, up 16½p at 634½p, have risen from about 460p in October and sell on less than 14 times’ earnings. Not cheap historically, but this is one to tuck away for the long term.
Revenue £1.22bn
Dividends 15.4p
MY ADVICE Buy long term
WHY RPC is a consolidator that grinds out gradual, steady improvements in margins and revenues, so the shares look good value
January’s profit warning from Oxford Instruments was a true surprise, from a company that had barely put a foot wrong before and had become one of the stars of British high-tech, supplying components to companies engaged in nanotechnology research.
Attention at the time focused on the withdrawal of export licences to Russia for plasma technology that someone in Whitehall took the view had military use. In fact, that was one of three problems.
Revenue was falling at the industrial analysis division, because of the timing of a big earlier contract and the loss of market leadership, now addressed by the introduction of a new suite of products.
In Japan, public spending was shifted from research to infrastructure projects. Again, this has been resolved as orders have come back and that country should account again for 10 per cent of revenues in the current year.
The damage was apparent in figures for the year to the end of March. On an underlying basis, revenues fell by 5.4 per cent, leaving pre-tax profits £11.5 million lower at £35.6 million.
There is not a lot that Oxford can do about Russia and the company sensibly is forecasting no orders from there this financial year. The other factors mean that organic growth should pick up again, while the £8 million in cost savings will kick in.
Oxford shares, which fell by more than a quarter after the profits warning, have recovered strongly since, although they fell 84p to 982p yesterday. On 17 times’ earnings, I would be buying for the long term.
Revenue £386m
Dividends 13p
MY ADVICE Buy long term
WHY Fall looks to be overdone given return to growth
Most people, if they think of it at all, probably still think of John Menzies as a Scottish distributor of newspapers and magazines. However, the company has been expanding its aviation services, working at hubs such as Heathrow but still delivering less than half its earnings, while trying to use its existing distribution network to move more product through, such as parcels and packages.
This has gone only as far as newsagents and retailers, at the moment. Menzies is moving in a limited way into the “last mile” to the household, paying £7.5 million, or a little less than one year’s revenues, for AJG Parcels, which delivers in the hard-to-reach areas of Scotland’s Highlands and islands. The last mile is fiercely competitive in the big conurbations, but there is scope to replicate AJG’s model in more remote areas.
The complications are twofold. In November, Menzies put out a profit warning to do with the airports side, while a Swiss activist investor wants the group to be split into its two constituent businesses.
The shares, up 6¾p at 459p, sell on ten times’ earnings. They are an interesting, if speculative, buy on future developments.
£7.5m price paid for AJG Parcels
MY ADVICE Buy
WHY Shares look artificially cheap, given their potential
And finally . . .
Shore Capital, the house broker, has cut back its forecasts for Poundland for the second time since spring began to take account of the retailer’s own warning on the effect of the low euro. This should be minimal, because Poundland has a fledgeling operation in Spain and some Irish stores, but the company has indicated a £4 million hit for the year to the end of March when the figures are out tomorrow week. Shore is also worried about a sluggish UK retail environment. The numbers may not be terribly good news for the price, then.
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