RPC

[spiderbill]

So RPC starts the day at 964p, announces a 59% rise in first half year profits and share price quickly rises to 1022p, then plunges to 892p before recovering a little to current (11.30am) 921p

Sometimes I think I don't understand the stock market. Othere times I'm sure I don't.

[grimer]

Bizarre.

Perhaps the early rise caused people to take profits / get out? That caused momentum downwards? Or did the analysts see something in the accounts that was missed earlier?

I'm holding.

[spiderbill]

Yes, I've since found a couple of threads on other boards but no-one seems to have a clue what's going on.
Ended up 7¼% down!

If it's still there in the morning I think I'll top up. It's a share that done well for me so far and I can't see how increasing profits by that much can be less than a good thing, even if some of it's from aquisitions.

[simoan]

Yes, I've since found a couple of threads on other boards but no-one seems to have a clue what's going on.
Ended up 7¼% down!

I am surprised that no-one has a clue. Perhaps it's because only novice investors find RPC attractive as an investment? The Elephant in the room with RPC is the debt and yet this is not mentioned in the Key Financial Highlights section at the top of the report. I would suggest net debt is a key financial highlight for this company and in particular how it is reducing from it's current very high level. And yet the first time it is mentioned in the RNS they say:

The Group retains a strong balance sheet with net debt of £1,070m (March 2017: £1,049m) representing a pro forma 1.8x EBITDA multiple (March 2017:1.8x).

So net debt has actually increased further since the interim results - no wonder they didn't want to highlight that! I think most investors would suggest that RPC does not have a strong balance sheet so this statement is really stretching the credibility of the management. Let's hope trading continues well because if it turns down this has the makings of another Carillion.

All the best, Si

[spiderbill]

Hi Simoan, thanks for your response.

I am surprised that no-one has a clue. Perhaps it's because only novice investors find RPC attractive as an investment?

Given that it was one of the most recommended shares in the TMF Share Advisor portfolio I'm going to guess you don't think much of their suggestions

I dropped my membership a year or so ago - too many duds and not enough acknowledgement of them - but RPC has done well for me.

The Elephant in the room with RPC is the debt and yet this is not mentioned in the Key Financial Highlights section at the top of the report. I would suggest net debt is a key financial highlight for this company and in particular how it is reducing from it's current very high level.

I was aware that debt was high due to aquisitions but hadn't spotted that it had risen further - thanks for highlighting that.

Still doesn't entirely explain why the SP initially rose strongly before then falling - unless corporate investors have a habit of buying on the headlines before they've digested the detail. Though that wouldn't surprise me.

So net debt has actually increased further since the interim results - no wonder they didn't want to highlight that! I think most investors would suggest that RPC does not have a strong balance sheet so this statement is really stretching the credibility of the management. Let's hope trading continues well because if it turns down this has the makings of another Carillion.

Oh dear, I do hope you're powers of prediction are mistaken! Between Carillion, Petrofac, Greene King and Galliford Try I could do with some good news for a change next year.

cheers
Spiderbill

[simoan]

Given that it was one of the most recommended shares in the TMF Share Advisor portfolio I'm going to guess you don't think much of their suggestions

I dropped my membership a year or so ago - too many duds and not enough acknowledgement of them - but RPC has done well for me.

The original ethos of TMF was great i.e. to do your own thing and not use financial advisors (the "Wise" as they used to call them). And then the poacher turned gamekeeper. I lost interest at that point. I have no idea what Share Advisor is, but if it's even half as useless as their editorials, then it's completely worthless and you should just put your money in Fundsmith or Lindsell Train funds and save a lot of wasted time and effort.

I was aware that debt was high due to aquisitions but hadn't spotted that it had risen further - thanks for highlighting that.

Still doesn't entirely explain why the SP initially rose strongly before then falling - unless corporate investors have a habit of buying on the headlines before they've digested the detail. Though that wouldn't surprise me.

The SP will be volatile on news days as I imagine there is quite a large short position in RPC. Given the weakness of the financial position who's to say those that are short will not be proved right in the long run? The company is destroying value and reducing the quality of earnings through acquisitions whilst running up a lot of debt. You can get away with this in good times but when something goes wrong things can very quickly go pear-shaped. Of course, if the merde hits the fan the management will wander if into the sunset with a large pay-offs and bulging pension schemes.

All the best, Si

[Bouleversee]

I also thought the results were quite encouraging and was surprised by the fall. I was aware that they had been heavily shorted earlier in the year (on the grounds of too many acquisitions too quickly to be successfully integrated but hadn't been monitoring that and when the s.p. went up following the statement I gleefully thought that would be one in the eye for the shorters. I was aware of the debt but rather assumed that was normal in the event of takeovers and a deliberate strategy in view of the multiple buybacks of their shares, which I don't think any of you have mentioned. Although RNS announcements pop into my inbox about these quite frequently, I don't keep track of the numbers and value so don't know whether it is small beer or significant in relation to the increased debt and am not sufficiently knowledgeable to make any judgement about the wisdom of this strategy. Wiser heads may care to discuss.

IIRC (not necessarily the case these days!) Tempus in The Times recommended them as a buy not that long ago, but in a section about risky investments on Nov. 25, under Handle with Care, where some 'experts' warned about individual stocks, Ross Mould of AJ Bell "This plastic packaging company is a favourite of brokers and is not on an excessive valuation. However, the warning signs are there with multiple acquisitions frequent restatement of earnings figures and triggers for management bonuses that rely on adjusted earnings numbers. I'm not too worried about the acquisitions, which included British Polythene Industries which had done brilliantly for me over several years and if it no longer does so, I think it will be down to Brexit. As regards multiple takeovers, what about VCP, another of my holdings, which has rocketed since it brought in a new CEO who immediately embarked on a string of t/os, pays no dividend and has a high p/e ratio? I don't hear any adverse comments about them or anything about shorting in their case. Like the OP, I don't know what to make of all this. Whose opinion should those of us who are not too clued up about interpreting balance sheets go by? I, too, would discount TMF but how to choose between Mr Mould and the quite large number of brokers who are recommending RPC as strong buy or overweight, with a target price of 1250p in one case, I wouldn't know.

Thinking about the sharp rise and subsequent fall in RPC's sp the other day, could this be simply due to shorters buying to cover positions and then shorting again?. I have to confess I don't really understand shorting either but anyone who has followed the trajectory of PFC since the SFO investigation was announced and watched it move sideways with quite steep daily ups and downs (sufficient for traders to make money every day) will, I would imagine, have come to the conclusion that the s.p. has absolutely nothing to do with the intrinsic valuation of the company and everything to do with opportunism and manipulation of the markets and algorithms. All over my head.

I see no reason to sell RPC myself (possibly famous last words) and had in fact been considering topping up as their performance compares very favourably with most of my holdings but Simoan's comments have made me pause for thought. I'll see what further comments arise and whether this weekend's papers have anything to say about them.

[simoan]

Hi Bouleversee,

I'm not too worried about the acquisitions, which included British Polythene Industries which had done brilliantly for me over several years and if it no longer does so, I think it will be down to Brexit. As regards multiple takeovers, what about VCP, another of my holdings, which has rocketed since it brought in a new CEO who immediately embarked on a string of t/os, pays no dividend and has a high p/e ratio? I don't hear any adverse comments about them or anything about shorting in their case.

Frankly, you should be worried about the acquisitions because the quality of the companies being acquired is poor i.e. they are taking on debt to buy assets with a worse return on capital than their own. You should maybe consider the trend in Return On Capital before and after the acquisition spree started - I only have 5 years of data but ROCE was 13% in 2012 and has steadily reduced to 5%. That's a very bad sign, and not a sign of a good company. Terry Smith has written articles on the importance of ROCE in investing including it's early warning that things were going wrong at Tesco, and more latterly in a similar vein, AstraZeneca: https://www.fundsmith.co.uk/news/articl ... like-tesco

To make matters worse, RPC quotes it's own version of ROCE which flatters it and makes the assets look more productive than they are by excluding and adjusting out all kinds of things. Here's the small-print disclaimer from the latest results on ROCE:

6 ROCE is adjusted operating profit for continuing operations (annualised for half year reporting), divided by the average of opening and closing shareholders' equity, after adjusting for net retirement benefit obligations, assets held for sale, acquisition intangibles and net borrowings for the period concerned.

Your comparison with Victoria is not valid because there is no sign that the acquisitions made have decreased the return on capital in the same way as they have for RPC. This is a sign of better quality management making good acquisitions. I held RPC and sold earlier this year for this reason. Not everyone considers ROCE important, but you should if you're a long term investor who wants to hold good quality companies.

All the best, Si

[Bouleversee]

Very good points, Simoan.. I'll look at that article tomorrow. I acquired my RPC shares as a result of their takeover of British Polythene Industries and don't know much about their previous history or anything about the other companies they have taken over but I certainly wouldn't describe BPI as a poor quality company. They had done very well for me in recent years and I was sorry to see them go. I agree that ROCE is important. I will certainly delve a bit more deeply and reconsider before buying more. Nevertheless they compare favourably with most of the shares in my p.f. I really don't know what is worth buying at present; perhaps I should sit on my hands or do some selling.

[simoan]

I acquired my RPC shares as a result of their takeover of British Polythene Industries and don't know much about their previous history or anything about the other companies they have taken over but I certainly wouldn't describe BPI as a poor quality company. They had done very well for me in recent years and I was sorry to see them go.

I wasn't making any judgement on the quality of BPI as a company. It's easy to calculate the ROCE for BPI if you look at their last full year results to year end 2015 - ROCE was approx. 14%, so reasonably good. Any effect BPI has on improving the overall ROCE of RPC will be very small and will probably not show until the end of this financial year. So I guess you need to decide whether you are happy to swap your BPI shares for those in RPC, a company that uses its capital less than half as efficiently.

Part of the reason for making acquisitions is to improve the operating efficiency and remove costs to increase or maintain the return on capital of the acquiring company. Ideally, the end result should be maintaining ROCE whilst increasing EPS. If this does not happen then you have to question how good the management are, and why they are making acquisitions at all? If EPS increases but ROCE falls, as has been the case with RPC (in common with Tesco) then that's a warning sign flashing, particularly if debt is increasingly a lot too (also the case with Tesco).

All the best, Si

[Bouleversee]

Thanks, Si. More food for thought. You've got me worried now as I already have a lot of losses. What ROCE do you look for before buying and if, as I think you suggested, it can be manipulated, how does someone like me who finds balance sheets difficult to understand, know what the true figure is?
But aren't most companies struggling at the moment? Perhaps you could give us some examples which would satisfy your criteria. How does one find them? Perhaps we should be selling everything?

[simoan]

Thanks, Si. More food for thought. You've got me worried now as I already have a lot of losses.

I'm sorry to hear about the losses, we all suffer those but we just need to ensure the winners outnumber them to give decent returns that make investing for ourselves worthwhile. I didn't mean to make you concerned with my comments about RPC. Ultimately you need to do your own research and decide on the best way forwards. There are no signs that RPC is imminently going to hit the rocks it's just the amount of debt and acquired intangibles that means NTAV is negative, and as I've said, ROCE has been declining for some years now as a result of the acquisitions that made me decide to sell. Of course, the share price has gone up since I sold but I am happier about the decreased risk in my portfolio. You pays ya money, you takes ya choice...

What ROCE do you look for before buying and if, as I think you suggested, it can be manipulated, how does someone like me who finds balance sheets difficult to understand, know what the true figure is?

There is no one-size fits all approach with ROCE and it is not the be-all and end-all. Some companies will always have a poor ROCE due to the nature of their business i.e. asset plays like property companies where the assets are essentially unproductive in their own right. Other companies that generate returns from very few assets (e.g. service companies like marketing, legal or recruitment) should always have a higher ROCE than a company that makes things using expensive machinery from a factory. However, ROCE is generally a good indication of quality for companies that make and/or sell products - it's the reason the likes of Unilever and Diageo are always so highly rated on a simple PER basis - because they have consistently above average return on capital.

But aren't most companies struggling at the moment? Perhaps you could give us some examples which would satisfy your criteria. How does one find them?

You can easily calculate ROCE. You only need three numbers from the results: the Operating profit or EBIT from the Income statement, and the Total Assets and Total Current Liabilities from the balance sheet section. Here's the last FY results for one of my high quality holdings that is reporting tomorrow: https://www.investegate.co.uk/victrex-p ... 00060211R/

It's a good example because it's a nice clean layout with no dodgy adjustments to various numbers. If you go to the Income statement you will find the Operating Profit = £100.3m. If you then go to the balance sheet lower down you will find Total Assets = £472.7m and Total Current Liabilities = £53.8m. You can then calculate ROCE % = Operating Profit / ( Total Assets - Total Current Liabilities) = 100.3/(472.7 - 53.8) = 23.9%. That's a pretty good ROCE!! I hope it's stayed that high when I read the results tomorrow...

All the best, SI

[Bouleversee]

Simoan.

Thanks for the info.which I will try to digest. One would think that the brokers recommending RPC as a strong buy (8) or a buy (1) (with nobody suggesting selling) would have gone into all that. I certainly don't have time to plough through page after page of results of every company I hold or might be interested in but I will keep an eye on ROCE in future. I note that James Fisher's ROCE (they are one of my largest holdings) is 24.4% but the s.p. hasn't done much this year and the div. is not exciting. Brokers seem to take no interest though they have done very well for me over the years as regards capital appreciation. .

As for RPC, I won't add but will keep a watchful eye for the time being. They have a well covered reasonable forecast yield and the sp has gone up quite a lot in the padst 6 months so I'm hoping that they will lick some of those poor quality companies into shape and that the debt will reduce.

It will be interesing to see what Victrex comes up with tomorrow. Not a company I know anything about.

ATB to you as well.

Bouleversee

. .

[simoan]

I note that James Fisher's ROCE (they are one of my largest holdings) is 24.4% but the s.p. hasn't done much this year and the div. is not exciting.

Is it? I just had a quick look at the last FY results and calculated ROCE as 12%, so half your figure. It also seems to be on a slow downtrend from 19% in 2012, so perhaps that suggests why the share price is not doing much? It's not a company I know much about tbh. However, if you calculated the ROCE % yourself, I suggest you have another go!

All the best, Si

[Bouleversee]

I note that James Fisher's ROCE (they are one of my largest holdings) is 24.4% but the s.p. hasn't done much this year and the div. is not exciting.

Is it? I just had a quick look at the last FY results and calculated ROCE as 12%, so half your figure. It also seems to be on a slow downtrend from 19% in 2012, so perhaps that suggests why the share price is not doing much? It's not a company I know much about tbh. However, if you calculated the ROCE % yourself, I suggest you have another go!

All the best, Si

No, I haven't had time to digest and apply your instructions yet (pandemonium here as decorators are in); I got it off Digitallook's website: http://www.digitallook.com/equity/Fisher_James_Sons. I'll leave it to you to tell D/L their figs. are up the creek.

[Bouleversee]

All the share buyback activity doesn't seem to have achieved anything as regards the s.p. of RPC. I don't know what it is likely to have done to the debt level.

I presume the current anti-plastic sentiment must have a bearing but does anyone have any views as to how the particular plastics produced by RPC and the companies they have acquired are likely to be affected by govt. legislation and consumer attitudes?

[Nocton]

The plastic reaction has been over-done. We are not likely to use much less plastic as it would lead to more wasted food and broken items - the key thing is to recycle what we use, e.g. all the thin film plastic bags and the PET bottles. IMO RPC, as a major recycler, is likely to benefit from the current hysteria. There is a good discussion on ADFVN.

[Bouleversee]

Many thanks.

[gbjbaanb]

The plastic reaction has been over-done. We are not likely to use much less plastic as it would lead to more wasted food and broken items - the key thing is to recycle what we use, e.g. all the thin film plastic bags and the PET bottles. IMO RPC, as a major recycler, is likely to benefit from the current hysteria. There is a good discussion on ADFVN.

and, of course, if China is no longer accepting all that plastic waste, its going to have to go somewhere and I'd have thought RPC is a likely target for all that business.

[Bouleversee]

I had a look at the thread on ADVFN and it was somewhat reassuring. It included the following link:

https://www.spectator.co.uk/2018/01/rev ... 03_NONSUBS

As suggested, it would seem like a good opportunity for RPC to cash in on recycling. Remains to be seen whether they will seize it. I have never been able to see how there could be any economic advantage in sending our plastic waste to China.

Now might be a good time to buy if it is starting to perk up.