RPC dividends not enough to dispel worries over plastic regulation, strategy

With total revenues in the year to 31 March up 33% to £3.7bn if the benefit of currency swings is excluded, the benefit of its acquisitive strategy was clear, with organic sales growth up just 2.8%.

Adjusted operating profit was up 38% and profit before tax 32% to £389.4m, this fed through to earnings per share up 13% to 72p.

Free cash flow, however, was 4% down to £229.2m, which was put down to an increase in working capital. Nonetheless, the group announced a final dividend of 20.2p, taking the full year payment to 28p per share, up 17% on the previous year and the 25th year of consecutive growth.

The shares fell more than 12% on Wednesday morning, however, as the strong performance had been well flagged in a trading update in March, with the lower free cash flow by 4%. Analysts said some disappointment could be centred on the weaker free cash flow, though concerns around plastics regulation in the European Union in particular were the the main drag on the stock.

Analysts at Northern Trust Capital Markets have criticised the company's acquisitive strategy as a "rights-issue funded, value destroying roll-up story", with the results showing free cash flow that ''looks low" and organic growth "not flowing through into profits", raising further "questions about underlying growth".

But RPC chief executive Pim Vervaat stressed that the company was "strategically strong" and has "the scale, innovative capabilities and ambition coupled with the financial strength to exploit unprecedented market opportunities", based on its track record of working with customers to develop environmentally-responsible plastic products and being "uniquely placed to contribute to a sustainable future for plastics and to deliver further growth and returns to shareholders".

He pointed out that RPC can benefit from any trends in the market growth as it can work with customers at the design stage and throughout the product lifecycle to improve the recyclability and reusability of products.

Vervaat said the board's ongoing review of the business portfolio has seen it improve its exposure to added-value products including plastic products that can be more easily recycled or reused, which he said would improve the overall quality of earnings.

The Dutchman's latest review has identified smaller units on the fringes of core businesses that can be disposed in coming months, with the total equating to £209m of turnover and has approved by the board for sale since the year-end.

Northern Trust argued that RPC’s definitions of adjusted profit and free cash flow had been inconsistent over the past five years, and had flattered the figures in ways that sometimes “defy accounting logic”, with the pace of RPC's acquisitions masking its structurally weak underlying business.

Analysts said that if "the hitherto supportive appetite for rights issues fade, we think shareholders will find a structurally challenged, low margin, highly levered, sub cost-of-capital business trading on circa 23 times [historic] earnings on our estimates, an undeserved 50 per cent premium to the market".

Panmure Gordon argued that accounting provisions more than halved to £53.3m which was "a key indication that one-off items are directly related to the acquisitions and the associated restructuring of the business, rather than an attempt to mask the underlying profitability of the business".

Panmure felt that while cash conversion moved backwards to free cash flow of £259m after tax, exceptional items and maintenance expenditure, short if its forecast of £288m, this suggested conversion at 78%, down from 82%. "The reason for this unexpected contraction was a significant investment in working capital. Within the mix, there was a £39.3m investment in inventories, £29.5m investment in receivables. Management has indicated some of this is seasonal and some reflects investment in growing the business."

Nicholas Hyett, analyst at Hargreaves Lansdown, felt the numbers were in line with expectations and noted that RPC does not manufacture any of the products that will be restricted under the EU proposals, and continues to invest in recyclable, renewable and biodegradable plastics.

He agreed cash flow was "perhaps a little disappointing" and "the worries about increased scrutiny haven’t been dispelled" but overall felt the company is being "harshly treated".

"Fortunately RPC, like its packaging, is resilient. A comfortable balance sheet position and plenty of free cash should allow the group to ride out the storm, but investors will have to wait for sentiment towards RPC and its product to improve for a recovery.”