One of the problems British Polythene Industries has experienced in recent years is that the price it pays for polymer, its basic raw material, to the big plastics producers does not always seem to reflect what is happening in the market.
Whenever the price falls it mysteriously seems to rise again, a coincidence alluded to again in the last trading statement last month.
Once RPC has control of BPI, the former’s take from those big producers will rise by a third to 800,000 tonnes a year. It is pretty certain that this improved buying power will result in better prices for the raw material. That pricing power is one of the reasons behind RPC’s purchase of BPI for in excess of £260 million.
That price is in line with the previous three deals in the packaging area RPC has done, such as the purchase of Global Closure Systems for £470 million. It is too early to judge that deal, but RPC has proven its ability to integrate such acquisitions and gain growth that way, as well as increasing sales from existing businesses as customers such as supermarkets seek more efficient packaging from fewer suppliers.
This and the rise of that retail model in eastern Europe and elsewhere is fuelling the expansion of the packaging industry, dominated by a few large players. BPI also brings with it an entry into a market where RPC does not yet operate. It supplies farmers with polytunnels and with the wrapping for silage, a specialist product with a high profile in agriculture. There are the inevitable synergies from putting sales forces and other operations together.
BPI shares have done little since the start of 2014, so the 30 per cent premium to the last share price RPC is offering is understandably attractive and has the support of a fifth of the share register already. The deal makes sense to both sides, and BPI has been on the radar for years. As usual, RPC is promising an immediate payback and more once those synergies are achieved.
I promoted RPC shares late last year at a little more than £7. They rose 27½ p to 843p yesterday despite a £90 million placing that ensures the balance sheet is not too stretched to take advantage of further small bolt-ons. On almost 16 times earnings I would still be a buyer.
Revenue £1.64bn; dividend yield 2.4%; pre-tax profit £160.6m
MY ADVICE Buy
WHY RPC’s record in doing deals while achieving organic growth is proven, and the latest acquistion looks good for both sides
Auto Trader Group
It might seem perverse for a company that floated little more than a year ago, raising funds to cut debt, to decide now to hand cash back to shareholders, but that is what Auto Trader is doing. There was talk at the time that the company might be flipped to another private equity firm, but the price mentioned then, £2 billion, is about half the present market capitalisation.
Investors have done well enough, then. The shares, floated at 235p, added 21½p to 424p on news of that share buyback and the first full-year figures that exceeded expectations. The fact is that, having used its strong cashflow in that first year to move down debt to about twice earnings, which is comfortable enough, there is not a lot else that the company can do with the excess cash that can only pile up.
It is cutting costs by using fewer staff and there is little capital spending needed. Auto Trader is the clear market leader, used by about 85 per cent of UK car dealers to advertise their wares. That proportion grew by only 0.5 per cent last year and will not budge much further.
However, the other metric that performance is measured on, the average revenue that goes through each forecourt, was up by more than 10 per cent and will keep growing as new services are added on for those retailers.
The shares sell on 28 times earnings. Given that there is no intention of moving outside that core market, this rating seems to take into account an awful lot of that growth potential.
Revenue £282m; dividend yield 1.2%; pre-tax profit £155m
MY ADVICE Avoid
WHY The share price rating looks full enough for now
PZ Cussons
There cannot be that many companies which have had to announce an exceptional charge from buying currencies on the black market because there are no dollars available officially — but that is one of the perils of doing business in Nigeria.
PZ Cussons, the soap to shampoo maker, gets a quarter of its profits from Africa’s biggest economy, where the supply of dollars at the official market rate, 200 naira to the greenback, has run out. To settle a debt of about $50 million due in March, the company was forced to go into the “secondary market” to source dollars at a rate possibly in excess of 300 naira. There is a good chance that the Nigerian central bank will devalue the currency. This would depress reported profits but make trading locally easier.
Other than that the company is holding its market share well in Nigeria while efforts elsewhere to diversify into tanning and beauty products are still bearing fruit. The shares, up 2½p at 335½p, have this year been breaking out of their earlier lows. They sell on 19 times earnings; that Nigerian uncertainty would worry me, though.
Estimated revenue £821m; estimated pre-tax profit £101m; dividend yield 2.4%
MY ADVICE Avoid
WHY Too many doubts over Nigerian naira
And finally . . .
Without taking away from the achievements of those operating in the sector, it has been difficult not to make money out of providing student accommodation in recent years. The university population has been growing, not least students from overseas. Watkin Jones, which has provided 28,000 beds across 88 sites, arrived on AIM in March and the shares are comfortably ahead of the £1 float price. Confident half-way figures show that the vast majority of beds in the pipeline have already been sold.
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