RPC plc. A Plastics Packaging Company and Restructuring Story.

RPC is a supplier of rigid plastic packaging.  It is an interesting stock because it gives you the chance to play lower oil prices (margins should improve) not only via lower polymer prices but also via lower energy prices. Conversely, margins would fall should they oil prices go up.

RPC’s end markets tend to be loaded towards the food sector and also towards household consumer products like lipstick cases and coffee capsules etc. As such, they can be seen as a defensive play. They sell primarily into Europe, having expanded into Continental Europe over the years. The three divisions of thermoforming, injection moulding and blowforming are all single digit margin businesses.

Even though they are defensive in their end markets, they are still cyclically exposed because when economies slowdown in industries like plastics manufacturing-capital intensive, operators need to keep capacity utilisation high-they usually get price competitive and try to grab market share.

Before showcasing the numbers, I should point out that these numbers are adjusted to exclude restructuring costs. And there has been a lot of restructuring over the years! In a sense, the story of RPC is a company struggling against rising commodity costs whilst refocusing their activities and making cost efficiency savings.

RPC					Year to March
			2006	2007	2008	2009	2010
Turnover			611.5	645.7	695.2	769.1	719.9
Adjusted Operating Profit			36.8	38.1	40.6	35.5	40.9
Margin			6.02%	5.90%	5.84%	4.62%	5.68%
Inventory			86.37	94.20	110.30	87.90	96.40
Inventory Days			54.85	56.59	61.50	43.73	51.82
Debtors			117.29	128.20	139.90	120.70	125.80
Debtor Days			70.01	72.47	73.45	57.28	63.78
Creditors			135.87	130.80	157.70	164.60	185.60
Creditor Days			86.29	78.57	87.93	81.90	99.77
Op Cash Flow			66.60	65.10	56.20	49.60	55.90
Working Capital			-2.09	-24.20	7.30	65.60	15.50
Tax			-9.67	-7.50	-10.90	-5.10	-2.20
Interest			-7.92	-8.40	-10.60	-10.60	-4.50
Net Op Cash Flow			46.93	25.00	42.00	99.50	64.70
Capex			-50.31	-35.50	-33.40	-33.40	-28.00
FCF			-3.39	-10.50	8.60	66.10	36.70
FCF*			-1.30	13.70	1.30	0.50	21.20
FCFYield			-1.17%	-3.64%	2.98%	22.91%	12.72%
FCF*Yield			-0.45%	4.75%	0.45%	0.17%	7.35%
FCF*Normal			5.44%	5.27%	1.39%	-0.24%	5.13%
Depreciation			-33.31	-34.00	-30.70	-34.60	-34.40
Capex/Dep			1.51	1.04	1.09	0.97	0.81

I should explain that FCF* is simply free cash flow but with working capital neutralised. Similarly, FCFNormal is the free cash flow whereby I have equalised capex with depreciation. It helps to get a clear picture of what is going on.

Again, I should point out that almost every year there have been substantive restructuring. However, RPC know feel that they are beyond the restructuring phase and can now pursue growth. Indeed, free cash flow generation has been very strong recently but I suspect there will be some 'payback' as inventory levels may need to rise. Similarly, I'm not sure if the change in working capital (from a negative to a positive) is sustainable going forward. Their working capital requirements are somewhat dependent on where commodity prices go.

Longer term growth rates look to be around 4% but there is a cyclical element which will be tied to European growth rates. They do try and pass on oil price rises but are susceptible to sharp and volatile upwards movements.

In general, I like the restructuring here and think the current share price gives good value. However, I did not take a position as -short term- there are significant questions over the ability of European consumers to borrow as a result of the Sovereign Debt Crisis. The nightmare scenario for RPC would be surging Oil prices driven by emerging markets and speculation, coupled with European consumer entrenchment over austerity measures.

However, this is definitely one to monitor.