Had you taken my advice and bought RPC Group shares a fortnight ago amid all the post-Brexit market meltdown, you could probably have picked them up for little more than £7. The shares added 22½p to 813½p after news that not only was the company, as I suggested, a beneficiary of the lower pound but that trading was going rather better than expected.
Revenues in the quarter to the end of June were “significantly higher” than the same time last year and operating profits were also running “significantly ahead” of last year and of management expectations. This is a robust trading statement covering the first quarter of the company’s financial year, even before the full benefits of the lower pound kick in — three quarters of all revenues are generated outside the UK.
I have been tipping the shares for several years now. This is one of the more reliable of the consolidators. It grinds out organic growth year-on-year and increases this by regular acquisitions, generally achieving greater cost savings on these than initially forecast. Indeed, part of the outperformance has come from the last but one deal, the purchase of Global Closure Systems that was completed in March.
RPC has already indicated that there will be €80 million of cost savings coming from that deal and from the earlier purchase of Promens. The next deal has just been cleared by the European Commission. This is the £261 million purchase of the quoted British Polythene Industries, which is due to go to the vote of its shareholders this month.
No hitches are expected. As I have suggested, the deal is in the interests of both sets of shareholders. RPC is also enjoying the benefit of a reversal of last year’s rise in polymer prices, one of the main uncertainties the business has to cope with.
RPC is heavily involved in the food industry, making things such as those plastic coffee capsules, and this tends to hold up better than other sectors. Obviously, any recession in the UK or the eurozone would be a negative, but its markets are growing generally and the company can probably rely on 3 per cent to 4 per cent organic sales growth, added to by those acquisition benefits. The shares sell on 15 times’ earnings and this is one of those cases where you do not want to go short.
My advice Buy
Why RPC will be one of the beneficiaries of the lower pound, while the further prospects of acquisitions will fuel future growth
SThree
All of a sudden companies are highlighting the amount of business they get from outside the UK. Our three main Tempus candidates today get about three quarters of their business overseas and all will do well from the translation effects of those earnings. SThree looks the most vulnerable, though, because the second half of its financial year, which runs to the end of November, is traditionally the strongest half, providing three fifths of all the year’s business.
Recruitment specialists such as SThree are always going to be vulnerable to any economic slowdown and there is no indication how that half will pan out.
The company has some advantages. It is skewed towards the IT sector and towards temporary contract placements that tend to carry on regardless. So, while permanent placings fell by 12 per cent in the second quarter, with a particular fall-off from banks and financial services, contract placings were up by 11 per cent in the first half, and this is two thirds of gross profits. The shares fell by 13¼p to 229¾p amid the general uncertainty. They sell on ten times’ earnings, which looks cheap enough, but I would hold off buying for now.
My advice Avoid
Why Too early to take a view on the important second half
McBride
For some years now McBride has been crushed between the big supermarkets and the fast-moving consumer goods producers such as Procter & Gamble, both of which have been demanding better terms for the goods it produces for them. The company acted for any number of mid-tier retailers as well, business that was only marginally profitable.
The newish management team has said that it will exit this business, a process now pretty well complete as the company exits its financial year at the end of June. A client list of 600 has been whittled down to 150, at a cost of only £20 million in annual sales, or less than 3 per cent of the total. One has to wonder why this hasn’t happened before.
All this was predicted in February, when McBride released its halfway figures. Since then, of course, we have had the referendum. The reckoning is that Brexit will be broadly neutral. McBride gets 70 per cent of its revenues from the eurozone and plainly this will provide a positive translation effect. Against this, its UK operation will face higher costs from imported raw materials and the reckoning from the analysts is that the two will about cancel each other out.
The question is to what extent it will benefit from any rise in inflationary pressures in the UK, as and when this occurs. This looks fairly likely, because the high pound will push up prices It is too soon to take a view, though; the shares, up 5 ½ p at 158 ½ p, sell on 14 times’ earnings, which seems to merit little more than a hold.
My advice Hold
Why Shares look up with events, given uncertainties
And finally...
Much of what I have said about RPC Group applies to another packaging company, DS Smith. This, too, has most of its business in the eurozone and achieves growth both organically and by well-timed acquisitions. The shares are still below where they were before the referendum vote, which makes no sense at all. A note from Investec says the drivers for growth are still there and wonders where the next deal will come from. It estimates the company may have £500 million to spend and speculates on a first entry into North America.
