In a fairly quiet news flow day today we have had some acquisition, disposal and directors dealing news from a few stocks I have written on in the past. Firstly there is another acquisition and associated rights issue from RPC Group the £2bn rigid plastic container manufacturer which wrote up in detail some time ago and updated on it here.
This latest in a long line of deals from them, which have historically been successful, again looks sensible and given the price, expected synergies of €15m per annum and the financing arrangements looks as though it will be earnings enhancing, like previous deals.
They are paying £470m for GCS Group which is a leading global manufacturer and provider of closures and dispensing systems for consumer products in more than 100 countries worldwide. They are funding this with a mix of cash from a 1 for 5 rights issue at a discounted 460p and debt which is expected to leave their debt at a highish but manageable 2x EBITDA.
In summary on the benefits of the deal they say it will see:
Meanwhile we had a disposal of the national network assets from KCOM the Hull based telecom operator. This has raised £90m for them and pays down most of their debt. I estimate this will be roughly neutral as the £4m net cost of using the network going forward will roughly match the interest cost savings. However as they say it does give them capacity to accelerate investment in their plans to transform the group, without the need for any material increase in debt, while at the same time as providing shareholders with a clear medium term dividend commitment.
The shares had been suspiciously firm in the run up to this and have now moved to the top of their trading range over the last few years where they now also appear over bought in the short term. Thus it will be interesting to see if this deal and perhaps details of their
investment plans can prompt a further re-rating, although I note this is very much like a sale and leaseback deal that a retailer could undertake and as I don't see it enhancing earnings I'm not sure it really changes the story that dramatically. Thus given it is on a fairish looking 14x with limited growth and a low EBIT /EV yield the main attraction remains the 6% or so yield which has been growing strongly but is scheduled to be at least maintained at 6p after the current year as indicated by the Company in their interims recently,
So on that basis I would be tempted to suggest locking in some profits up here, although maybe I could be missing something here. But worth noting if you are in need of income the shares are due to go XD the 1.97p interim on 24th December.
Finally further to the bullish update from S&U which I mentioned on Friday. I note that the Chairman Anthony Coombs backed up his bullish comments with a purchase on Friday of 1,000 S&U Ordinary Shares at £24.05 per share which takes his total beneficial holding to 1,335,027 Ordinary Shares representing 11.2% of the total voting rights of the Company.
We have had results today from two companies that I have written on in the past namely Picton Property Income & RPC Group (click the names to read previous comments). In the case of Picton (PCTN) it is a little unfair to say a flat share price as that only really applies in the last 5 months or so as you can see in the chart below.
Prior to that as I had flagged before this property trust had delivered decent shareholder total returns of 50% in their previous year and has followed that up with a further 32% return in their latest results for the year to March 2015. When I last wrote on this one back in March this year they were at 72p which is roughly where they are today, although the latest announced NAV is catching up with the price coming in at 69p so the premium is now smaller than it was.
Going forward they have already announced that they intend to increase this years dividend from 3p to 3.3p which at 72p will give a gross yield of 4.58% which should still be covered as they continue to invest the proceeds of their most recent fund raising in income producing assets with another deal also being announced today.
So as the commercial property market seems to have some momentum behind it maybe this one can make some further progress in the year ahead, but again I would probably expect the rate of progress to slow again this year. Despite that this still looks like a good way to play growth in the sector in a diversified fashion with a decent yield too.
Moving onto RPC Group (RPC) I guess this is one where the flat share price tag perhaps is more relevant if you look at their chart below in so far as it is at around the same level as it was a year ago when I last wrote it up after their results at that time. However this masks some distortions and big swings that resulted from their acquisition related rights issue. Last year I mentioned that this is often a good opportunity to add cheaply to a holding during the process. Indeed I followed my own advice from last year and picked up some more of this one around the 500p level during last years rights issue.
This has worked out OK as the issue has been digested and they have started to bed in the acquisition of Promens Group and they have doubled the suggested synergies from this to €30m per annum in today results announcement. In this
they delivered revenues and earnings slightly ahead of consensus but the dividend was slightly light, due to the adjustment for the rights issue, coming in at 15.4p rather than the 15.7p that had been forecast, although it was still up by 12% in line with earnings against the re-based comparative. This extends their record to 22 years of rising dividends since the Group listed in the early 1990's (see my previous post for more history / Company details and today's results).
Looking at current forecast for the coming year, assuming no great changes after these figures suggests earnings of around 45p with a 17.5p dividend but up by around 11%. At a share price of 639p (+3.4% today) this would leave them on around 14x with a yield of 2.74%. This gives me a strange sense of deja vu as this is almost exactly the same prospective rating that it stood on when I wrote about it a year or so ago and back then I said it "seems fair for this well managed business."
It seems worth repeating this year so ditto and I note the shares are also approaching the highs of last year which could act as resistance in the short term as they approach over bought levels. I guess time will tell if they can break out from this range which might be a bullish sign for a re-rating, but in the absence of that I would suggest again that up here they remain a strong hold as part of a more broadly diversified income portfolio.
Background from their website with the graphic providing a good overview and the detail are as follows:
RPC was established in 1991 following the management buyout of the plastic operations of Reedpack Ltd from SCA. Originally comprising five UK factories, the company today has over 50 operations in 18 countries and employs around 8,000 people, with annual sales in excess of £1.1bn. It was listed on the London Stock Exchange in 1993 and entered the FTSE 250 in March 2011.
RPC is unique in offering products manufactured by the three main conversion processes – blow moulding, injection moulding and thermoforming, each technology producing different product characteristics that are suitable for specific packaging applications. It is structured along market and technological lines into six clusters which are aligned to these three processes.
Each cluster has on average seven manufacturing sites, operating across a wide geographical area for reasons of customer proximity, local market demand and manufacturing resource. Each plant is run autonomously.
This structure gives RPC a high degree of knowledge and expertise, along with the flexibility to deal with all types of sizes of businesses, and enables the company to deliver packaging solutions tailored each time to individual customer requirements, as well as the highest levels of service and support.
Strategy (from their website & today's announcement)
RPC’s strategy is to grow and develop leading positions in our chosen product markets and geographical areas in the rigid plastic packaging industry by maintaining strong long-term relationships with our customers and by developing high quality, innovative products that meet customer needs.
This is being achieved by continued innovation and investment, leveraging our leading technological capability and through strategic corporate development both in our existing core markets and new geographical regions.
The Group announced its Vision 2020: Focused Growth strategy in November 2013, which builds on RPC's strong market positions, leading innovation capabilities and the success of its investments in recent years. There are three core elements to Vision 2020, which are:
1) continuing our focused organic growth strategy in selected areas of the packaging markets;
2) selective consolidation in the still fragmented European packaging market through targeted acquisitions; and
3) creating a meaningful presence outside Europe.
During the formulation of Vision 2020 the Group also identified a number of further opportunities to optimise its existing asset base resulting in the final phase of the Fitter for the Future business optimisation programme. This included the decision to sell the Cobelplast and Offenburg businesses. Alongside the targeted focused growth strategy, the Group established de minimis (through the cycle) levels for RONOA of 20% and return on sales of 8%. The expectation is that the ROCE for the group of businesses prior to the recent acquisitions will continue to achieve a return of 20% through the cycle.
You can get a feel for their products from the picture below which you can click to explore these in greater detail if you want.
They reported their final results for the year to 31st March 2014 today. Turnover was up 7% at £1047 million v £1061 (F) with a 3% boost from acquisitions and some organic growth. While operating margins rose from 9.3% to 9.7% to five an operating profit of £101.3 million. This fed through to give earnings of 41.1 pence up by 11.4% against 37.9 pence (F) so a small beat there. The dividend was raised by a more modest 4% to 15.5 pence which was in line with forecast and means the dividend is covered nearly 2.7 x by earnings. They also report a RONOA figure of 24.5% up from 22.6% last year.
This leaves the stock on 15x and a 2.5% yield and around 14x and 2.75% for the current year which seems fair for this well managed business. I bought into this one in January 2011 at 248 pence during a rights issue period to fund their Superfos acquisition at that time. This is another thing I have learnt over the years that about a week before the end of a rights issue is the best time to try and pick up some cheap stock, if you like the deal or situation, as holders have to either elect to take up or sell rights at that time. This means the price tends to be at its weakest as that point in the process having gone ex rights etc. before that.
I have enjoyed the rise in the earnings and dividends since then and a modest re-rating which has delivered some useful triple digit returns for me. On the back of these numbers and the outlook I am happy to run with it as as part of a broadly diversified income portfolio even though the yield is now towards the lower end of what I normally look for from my investments as it is a Really Pukka Company which is well managed and not so boring after all!