Over the past four years RPC Group has looked at about 100 possible acquisitions in Europe but has agreed on just six. The number of potential targets reveals both the fragmented nature of the European packaging industry and the reason that the few big quoted UK players — mainly RPC, DS Smith and Mondi — are busy acquiring whatever they can.
The small number of deals carried out by RPC underscores the company’s caution, while those it has carried out seem to have been successful. For example, when it bought Promens in February for €386 million, it indicated that there would be about €15 million from putting the two businesses together. This was upgraded in the summer to €30 million and I suggested at the time there was more to come. RPC said yesterday that those savings would reach €50 million, from closing the Reykjavik head office and plants from both businesses and restructuring production elsewhere.
The industry is consolidating because growth is limited and customers, such as the big supermarkets, are under pressure to cut costs and use more efficient packaging, including products such as one developed by RPC that allows food to be stored in plastic containers at room temperature.
Packaging is a dull business and the three London-quoted players are little-known outside the City, yet they have been strong performers over the past couple of years. In June last year, RPC bought a business in China, which makes more sophisticated packaging for the motor industry, for example; this has been hit by currency effects as two thirds of output goes to Europe and the United States.
Halfway figures to the end of September show revenues up 36 per cent, benefiting from three of those acquisitions, especially Promens. On a like-for-like basis they were ahead by only 4 per cent. Operating profits were up by 36 per cent to £82.8 million and the dividend is raised for the 23rd year in a row.
The shares have risen sharply over the past year and yesterday added another 36p to 717p — the company overshot expectations because of those extra savings from Promens. They sell on about 15 times earnings and, given the benefits from future M&A, still look like good value.
Revenue £800m
Dividend 5.2p
€50m Synergies from Promens deal
MY ADVICE Buy
WHY RPC has demonstrated an ability to handle acquisitions and get the best out of them, and there are plenty more to go for
Investors in Britvic must be grateful that AG Barr, its fellow soft drinks producer, approached the company about a possible merger in late 2012. Barr walked away the next summer, but this prompted Britvic into a radical cost-saving and restructuring programme, which has raised margins and earnings without much help from the markets in which it operates.
Britvic shares were a little above 500p when Barr walked away. They fell 3p to 707p after a set of full-year figures to September 30 that show continuing flat markets but an 11 per cent rise in pre-tax profits to £147 million, largely thanks to those cost savings.
The company says it is gaining market share in all its four main divisions, but in the UK this is mainly a question of tiny percentage increases in volumes in markets that are falling by anything up to 2 per cent. As consumers shop elsewhere than supermarkets and the price war between these groups becomes more vicious, the big grocery chains are demanding better terms, while the poor summer weather didn’t help, either.
Only in France, where the weather was better, and Ireland, a weak market beforehand, were volume rises perceptible. Britvic is investing another £70 million to £80 million in IT, warehouses and the like, which will enhance earnings by another 15 per cent by 2020. It has a new business in Brazil and is about to start selling Fruit Shoots in the US.
The shares, though, on more than 14 times earnings, look to have much of the good news discounted, given those difficult home markets.
Revenue £1.3bn
Dividends 23p
MY ADVICE Avoid for now
WHY Shares are highly rated, given sluggish markets
There is an odd parallel between Hogg Robinson and recent developments in financial trading. The company receives most of its revenues from providing travel bookings to corporates. Traditionally, you rang it and it made the booking. However, this increasingly is being done by clients’ employees online, and then handled electronically.
The company gets a lower fee, which hits revenues in the short term, but, as it is cheaper to make the booking online, margins ultimately will improve as costs of handling phone calls are taken out. Voice broking to electronic broking, then. Hogg Robinson is part-way through this process. Revenues in the six months to September 30 fell by 4 per cent, but cost savings meant that operating profits were 16 per cent higher at £17.8 million.
The main factors for future profits will be GDP-related frequency of flying on the part of clients and new business wins. North America is slowing down and the state of the Australian economy means that Asia Pacific remains loss-making.
The shares, unchanged at 71¼p, sell on ten times earnings. At some stage the company will hand excess cash back to investors, which suggests progress in the long term.
Revenue £156m
Dividend 0.68p
MY ADVICE Buy long term
WHY Multiple is modest, with prospect of capital return
And finally...
I confess I had never heard of the AIM-quoted Japan Residential Investment Company. This is invested in properties in Tokyo and other Japanese cities. A fortnight ago it announced an agreed offer worth 72p a share, or £152.6 million, from Blackstone at a decent 24 per cent premium to net asset value. Case closed, except that there was another bidder around and it, presumably, is the source of a higher approach, worth 73½p a share. Not yet confirmed, but I doubt investors in Japan Residential can believe their luck.
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