Has RPC Group been buying growth? Some of its shareholders clearly think so and they’re not happy (Miles Costello writes). Nor is the chairman, who’s blaming his antsy investors for getting in the way of expansion and the company’s lowly valuation. There’s a tension and it looks as if sparks are set to fly.
RPC is a specialist in designing and making plastic packaging, which was set up in 1991 and has expanded rapidly through acquisitions. In fact, there have been no fewer than six transactions in the past two and a half years, costing the business a total of about £1.17 billion.
The company has taken its foot off the deal-making gas in the past year, save for a small foray into a business specialising in Germany and Poland, for $75 million, in recognition that for some shareholders, enough is enough. Still, RPC is a £3.2 billion business, a member of the FTSE 250 that operates in more than 34 countries and employs 25,000 staff.
The cracks are opening up, though. In an update before its annual meeting yesterday, RPC told shareholders that revenues had increased by 5.8 per cent to £964.7 million over the three months to the end of June against the same period last year. That’s a tidy sum.
What investors didn’t like was the underlying organic growth of 2 per cent, behind the run rate for the most recent financial year of 2.8 per cent. Some investors would have liked RPC to have told them it would be buying back shares to help boost the price, after the previous year’s plan to buy back up to £100 million.
Despite RPC’s management stating that profits and cashflow generating were coming in on target, the shares were marked as much as 7.5 per cent lower, before closing off 27½p at 747½p.
There was more. In a highly unusual move, Jamie Pike, chairman, used the update to take a swipe at investors. Those who fret that the group is too highly geared are getting in the way of the business pursuing “attractive opportunities for growth”, he said. While the company moves to resolve the dissent, RPC will prioritise generating cash and offloading non-core businesses, ploughing the proceeds back into the group or returning money to shareholders, he said.
Something’s not quite right. The packaging market — even in out-of-fashion plastics — is on song, not least because of the relentless rise in the business of deliveries, particularly from online orders. RPC also has some pretty heavyweight customers in sectors ranging from food, healthcare and consumer goods to oil and gas, including Nestlé, Unilever, Kraft Foods, BP and Procter & Gamble. Organic growth of 2 per cent seems light.
RPC’s shares are by no means expensive, trading on a little over 13 times earnings and yielding a highly reasonable 3.6 per cent. This column recommended buying them last year, when they were priced at about £10, since when they have lost about a quarter of their value.
There is no obvious near-term trigger likely to push them higher, save possibly for a potential private equity buyer to agree with management that the company is undervalued and make a bid.
Management maintains that the group is making its acquisitions pay, that the organic growth will come, and that RPC needs to take part in a consolidating market. Its argument is that despite the looming threat of tighter regulation of plastics, the sector will evolve, beginning to use sustainable, renewable materials that are less or non-polluting.
RPC has some proving to do when it comes to generating higher growth without deals; until then it is one to avoid.
ADVICE Sell
WHY Too reliant on acquisitions and needs to resolve differences with its investors
Severn Trent
A day of reckoning is coming for the water industry and not just a hosepipe ban like the summer of 1976 (Robert Lea writes).
All manner of people are raging against the iniquities of the ten regional water monopolies. Questions over whether they should stay in the private sector are being asked not just by John McDonnell, the shadow chancellor, and Michael Gove, the environment secretary. The media on both right and left are asking why their chief executives are paid more than £2 million a year to deliver a basic public service.
Smart people like Sir John Armitt, the country’s infrastructure czar, are concluding that, 30 years after privatisation and after almost as many years of scientists warning about the impact of climate change, water companies have not invested enough in the resilience of their resources. That is to ask why, when reservoirs and lakes are running dry, are the suppliers still losing up to a quarter of their treated water through leaks in their networks?
One person raging against the companies matters: Jonson Cox, the reforming chairman of Ofwat, who is determined to put the customer first.
The next five-year price review, which is to set bills from spring 2020 through to 2025, will be unprecedented. Mr Cox wants a shake-up of “corporate behaviours”. That means greater financial penalties and less easy money-making and questions over why shareholders should financially benefit more than customers.
Severn Trent, one of the three listed water monopolies, yesterday put a September date in the diary to tell investors and analysts what it expects from the price review.
The City has pretty much made up its mind, valuing Severn Trent’s shares 25 per cent lower than where they were 14 months ago. The stock’s one redeeming feature has been its 5 per cent dividend yield on the back of one most generous policies in the industry of annual increases of 4 percentage points over inflation— paid for by 3 per cent to 4 per cent annual increases in customers’ bills. That situation looks highly likely to unravel in the next price review. The rigours of that shake-up as well as political antagonism makes nothing in the sector attractive.
ADVICE Avoid
WHY Too much political and regulatory uncertainty