RPC Group: Internal Improvement Underway, Capacity For Expansion

Familiar themes in RPC’s Q3 update with a favourable mix and flat volumes, though a degree of polymer lag held profitability just below the comparable period last year. No surprises here and we still expect H2 and FY13 as a whole to be modestly up y-o-y overall. RPC has both internal improvement measures underway and capacity for expansion via acquisition. An undemanding rating and the potential to drive gains in a number of different ways should continue to attract investors.

Management actions maintain robust performance
The IMS statement was reasonably predictable for seasoned RPC watchers with key business drivers consistent with previous management comments and the general market environment. Volume stability is an important marker here, underscoring the defensive attributes of food packaging exposure in across a still mixed European economic environment. Undoubtedly, a series of management actions (ie investment, disposals, footprint optimisation and an acquisition) are all contributing to this fairly robust outturn. Encouragingly, there is more of this to feed through in Q4 and beyond.

Progress in prospect in H2
Activity levels in January are described as ‘good’. Together with slightly easier Q3 polymer prices, Manuplastics’ contribution, Euro strength latterly and ongoing mix improvements we expect H2 FY13 to finish modestly ahead of both the first six months trading and H2 FY12 and, hence, in line with our current estimates. Progress with the ‘Fitter for the Future’ optimisation programme should also keep RPC on the front foot. Otherwise, there is plenty of balance sheet capacity (interest cover approaching 10x, net debt falling below EBITDA next year and c £40m spare cash generation) with which to keep earnings and/or dividends moving ahead.

Valuation: Poise regained and upgrade potential
The initial weak reception for the H1 results has subsided and the share price is back at pre-results levels. At 430p, RPC is trading on a March PER of 10.6x, falling to 10.1x a year further out (EBITDA 5.8x and 5.2x on the same basis). While trading conditions remain mixed, the company has been adept in the past at setting achievable guidance, particularly with regard to internal, self-improvement initiatives (specifically RPC 2010 and the Superfos integration). Our sense is that Fitter for the Future benefits have not been fully factored into market expectations and are a possible source of future upgrades which would further increase the rating attraction.

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