RPC Group: Estimates Lowered

RPC Group, (RPC:LSE): Cautionary market comments at the H1 stage have been echoed in the FY IMS, leaving flat expected outturns for both closing and coming years, reducing our forecasts by 5% and 8% respectively. Returns and underlying cash flow are still enviably strong and we expect ongoing internal initiatives and potential acquisition activity to sustain this proposition. A 10x PER multiple overlooks these fundamental aspects.


Variable markets obscure underlying progress
FY13 was characterised by varied trading conditions across divisional and sub sector lines with overall demand also variable over the year. Aggregate headwinds (currency, polymer prices and subdued volumes) have restrained group operating profit to slightly below last year’s £93.5m. But, far from being a standstill year, the tail of Superfos synergies, improving mix, a small acquisition, and the start of the Fitter for the Future plant optimisation programme are all indicators of ongoing underlying qualitative group improvements. PBT guidance appears to be for flat outturns for FY13 and FY14, we have reduced our estimates by c 3% and c 7% respectively.

Proactivity in static markets
At the H1 stage, the Fitter for the Future project was unveiled with expected FY14 EBIT benefits of £4m, rising to £10m in FY15, reaching an annualised £12m in FY16. (RPC maintains a 20% average, through the cycle, group ROCE target – achieving c 18% in FY13 – and constantly reviews operations against this benchmark.) Also, more air time was given to possible acquisitions; the hiring of a new FD (Simon Kesterton) completes the previously announced FD to CEO succession in good time and brings M&A into focus again. The new FD brings experience in a manufacturing/automotive supply environment and there appears to be relevant acquisition (in Europe, Asia & US) and debt market aspects to this.

Valuation: Upside to come from active management
The “flat European outlook” has been taken to imply a repeat performance in FY14, c 10% below previous consensus earnings. While market caution is the order of the day, RPC has plenty of strings to its bow (eg net debt:EBITDA c 1.1x, interest cover approaching 10, or 15x on a cash basis – and underlying net cash flow of c £40m pa) to enhance group profit growth and shareholder returns. At 384p, revised estimates indicate historic/forward P/E ratios around 10x. This is not a standstill management team and we believe that RPC will be a corporately active business in the next year or so. The current entry point (valuation and balance sheet) suggests considerably more upside interest than downside.

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