Some of the sheen has returned to shares in RPC Group in the past few months, after a gloomy summer in which some investors began to question its rapid expansion.
Rigid Plastic Containers, to give the company its full name, makes a huge range of products including outdoor bins in the Netherlands, compostable coffee capsules in Poland and yoghurt pots in Michigan. The group’s shares did well during the general slump that followed last year’s European Union referendum, only to stumble this summer amid concerns that its acquisitive streak was a Pandora’s box of unexpected costs and problems. Executives led by Pim Vervaat, RPC’s ambitious boss, have said that the steady stream of deals, funded by the occasional rights issue, was a key part of the package.
The FTSE 250 stock has been one of the worst performers in the Tempus picks of the year, despite the recent recovery. It is down 7.9 per cent since January and slightly off the pace for potential promotion to the FTSE 100. RPC’s bosses have booked in a capital markets day on both sides of the Atlantic in November, before its half-year results, to retell its story to the investment community.
The company went some way to restoring investors’ faith yesterday by announcing that half-year revenues would be well ahead of last year and attributing the improvement to its acquisition drive, particularly strong growth in China and helpful moves in sterling and the price of polymer. Gross margins and profitability “are anticipated to be ahead of management expectations” as exceptional costs trail off, it said.
Management said in the trading statement that the company’s wide global presence had enabled it to grow through the economic cycle and ahead of British GDP.
RPC also made reassuring noises about the integration of Letica, an American food packager and the firm’s 18th acquisition since 2013, which was bought for £511 million as part of a strategy to bulk up the business by 2020. GCS, the French bottle-top maker, and British Polythene Industries, a smaller rival, are among other recent additions.
Almost 60 per cent of RPC’s sales are in mainland Europe and 27 per cent in Britain, leaving a fair amount of room to grow further afield. Yet there are lingering concerns that the company’s 35 separate divisions mean that it is already stretching itself too thin, producing a slew of one-off costs in each set of results while leaving adjusted earnings, and therefore management bonus targets, intact.
The group’s annual figures were released in June, showing a whopping 67 per cent rise in revenues to £2.7 billion and adjusted operating profits up 77 per cent to £308.2 million. Like-for-like sales rose by a more modest 3 per cent. At the same time, the cost of integrating and restructuring businesses rose from £79.1 million to £116.2 million.
RPC is still an effusive generator of cash, with its businesses pouring out £239 million in the year to March, more than double the previous year. Meanwhile net debt stood at just over £1 billion in June, and yesterday the company said that it remained well within its borrowing facilities.
Dividends have increased in an unbroken run for the past 24 years, and the group aims to cover the payment at 2.5 times earnings throughout its expansion.
It first share buyback, which began in July, has reached £12.4 million out of a possible £100 million, putting further support underneath the share price. The group is not expected to make any more big acquisitions this year, providing some breathing space while bedding in the new additions.
RPC shares currently trade on 13.6 times this year’s earnings, making it cheaper than the blue-chip packaging peers Mondi, at 14.6 times, and DS Smith, at 14.8. The capital markets day in November is the next testing ground for whether investors trust its strategy.
MY ADVICE Hold
WHY Reliable dividend track record despite the recent investor nerves
Cityfibre
One day, fibre-optic broadband will be a prosaic part of the landscape of British towns, no more interesting than plumbing and phone lines. For the next few decades, though, it’s the centre of an enormous race to connect as many properties as possible to the network. BT’s Openreach vans are a familiar sight as the firm digs up pavements, yet only 2.5 per cent of the UK is connected to fibre broadband, far behind most of Europe.
Virgin Media is ploughing its own furrow, building a network for its customers, and there are smaller firms including Hyperoptic and Gigaclear involved in the land grab.
Cityfibre has raised more than £200 million since floating in 2014 to take over cables already in place outside the M25, before filling in the gaps. It now has 42 urban networks that, when complete, could give high-speed direct lines to almost 4.4 million homes.
It’s early days, but the group makes money in three ways: installing big cables and street cabinets; installing direct cables into properties; and in its recently-acquired internet service provider Entanet.
The mucky business of fitting cables is filled with obstacles. The Aim-listed company’s stock fell more than 11 per cent yesterday after it lagged behind forecasts. Stretched local authorities sat on their hands during the pre-election purdah and before promised government grants to pay for broadband upgrades. Cityfibre added 83 public sector connections in the first six months of the year, down from 449 a year ago. Sales to businesses were also slower, with 616 clients signing up, down from 1,306.
There is more state support coming, including £1.54 billion for those building the plumbing needed for 5G internet. Meanwhile, Ofcom has told Openreach to cap prices for rivals accessing its tunnels and poles.
This should give investors confidence about Cityfibre’s growth prospects before its debt refinancing next year. It will lose money as it spends close to £400 million on its network over the next three years, according to analysts at Liberum. This year, the company aims to launch direct connections to homes in up to ten towns, following a trial in York with Sky and Talktalk.
MY ADVICE Buy
WHY A rare chance to back early-stage UK infrastructure
