Share tip of the week: a classic defensive stock with a resilient outlook
By
Tim Price Aug 22, 2008
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This week's 'buy' tip comes from the glamorous world of consumer packaging. The company manufactures and distributes packaging materials. It sells its products to the beauty, food, drinks and healthcare industries worldwide.
The FTSE 100-listed group employs 22,000 people across more than 20 jurisdictions. Roughly 70% of its business is in the drinks can market; the remaining 30% is in plastics. The majority of Rexam's customers are large consumer-products businesses.
Rexam (REX), rated OUTPERFORM by Lars Kjellberg at Credit Suisse
Rexam is the number-two name in consumer packaging (Tetra-Pak is the market leader, privately owned by the Rausing family) and the only company to operate in drinks cans (with the biggest market share) and rigid plastics (with a top five market share). Rexam is also outgrowing the industry, with 7% revenue growth expected for 2008, and it has industry-leading margins. Perhaps most importantly, Rexam has a resilient economic profile. The company operates in some of the most defensive market sectors and is exposed to the ongoing trend of rising at-home consumption (with the economic slowdown starting to bite, supermarket drinks sales are rising sharply at the expense of the pubs). Rexam is also the only quoted European pure-play stock in consumer packaging.
Interim results for the six months to June 2008 were impressive. Sales were up 30% to over £2bn; underlying operating profit was up by 47% to £217m, and underlying profit before tax grew by a healthy 61% to £158m. CEO Leslie Van de Walle, who joined the firm from Royal Dutch Shell, said the firm had beaten its own expectations "owing to good pricing, good cost recovery and further efficiency savings, including synergies". Growth in the drinks cans part of the business remained "robust", with margins expected to continue to improve.
Meanwhile, he said, "the enlarged plastic packaging business continues to make good progress. Recognising the uncertainty of the economic climate and the increasing input cost pressure, we anticipate that trading in the second half will be in line with our original expectations, giving us a strong overall performance for the year."
I have owned Rexam in my personal portfolio for some years, precisely for its defensive attributes. It has disappointed over that period, but there have recently been several management changes. The company has both a new chairman and chief executive this year, and the group's first-half results should have allayed some of the sceptics' concerns. So one attraction now is that Rexam is something of a turnaround story.
Lars Kjellberg of Credit Suisse is an unashamed bull on the stock. What to do with Rexam shares? "We recommend buy more," he says. "After two years of weak performance, margins and earnings are recovering strongly. We find Rexam's defensive growth characteristic highly attractive in turbulent markets and a slowing macro environment; a 5.5% dividend yield and a solid financial position adds to the attraction."
Fourteen brokers cover Rexam, according to Bloomberg analytics; ten (including Lars) rate the stock a 'Buy', with four rating it a 'Hold'. Nobody advocates selling. Rexam trades on a current p/e ratio of 13, with a forward p/e of 12. That puts it at a very modest premium to the FTSE 100 itself. The stock hit a recent low of 342p in early July, but the near-term technical outlook is positive for the chartists among you. More to the point, amid an economic environment that looks increasingly disastrous, Rexam is a classic defensive stock that should show resilience in the face of further equity-market weakness.
Recommendation: BUY at 397p
Tim Price is director of investment at PFP Wealth Management. He also edits The Price Report investment newsletter. Find out more about The Price Report here.
Paul Hill is away.
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