Shares in focus: The profits in packaging
Phil Oakley Feb 11, 2013
Rexam was hit by the weak economy, but is now well placed to prosper, says Phil Oakley.
Rexam is one of the world’s biggest consumer packaging firms. Its business is dominated by the 60 billion aluminium and steel cans it makes for the global drinks industry each year. It is the leading supplier of cans in Europe and South America and the second biggest in the US market.
It also makes plastic packaging for pharmaceutical firms. These are used in products such as asthma inhalers, nasal sprays and pill jars. It has 66 manufacturing sites in 22 countries. Rexam had sales of £4.7bn in 2011.
The company can trace its roots back to the 1880s when William Bowater set up a firm selling paper in London. During the 1920s his son, Eric Bowater, turned the firm’s focus to making paper. By the 1930s it was the largest producer of newsprint in Britain, becoming the world’s biggest in the 1950s.
Bowater’s move into packaging came in the 1940s when it started making corrugated paper. By the 1970s, it had turned itself into a large industrial conglomerate. The current firm took shape in 1995 when Bowater changed its name to Rexam and began focusing on consumer packaging with other parts of the business being sold off.
Rexam was transformed in 1999 when it bought European consumer packaging company PLM, followed by American National Can in 2000. In 2003, Rexam became the world’s biggest can company when it bought South America’s Latasa.
The financial crisis in the late 2000s hit hard as demand for its cans slumped. Rexam was left with too much debt, requiring it to slash spending and its dividend. It also tapped its shareholders for £350m of fresh money in 2009. The last couple of years have seen its fortunes recover and it is now in good health.
The chief executive
Graham Chipchase has been chief executive since 2010. He joined as finance director in 2003 and went on to head up Rexam’s plastics division before taking the top job. Having taken over the company at a tough time, he has steadied the ship and made Rexam leaner and more profitable. He’s been very well paid for his efforts, taking home £1.9m last year.
Should you buy the shares?
After going through a rough time a few years ago, Rexam seems to be doing quite nicely now. The business is firmly focused on getting more out of its assets, which should mean the firm and its shareholders will get richer over time. It is getting out of its personal-care business to concentrate on the more profitable beverage-cans market.
This is a good move. But Rexam isn’t just a cost-cutting and self-help story – it looks well placed to deliver some decent profit growth too. It’s on a recovering trend in the American market as it is winning back business it had previously lost from Coca-Cola. Stronger growth should also come from other parts of the world.
Around a third of Rexam’s revenue comes from emerging markets. It is the biggest maker of beverage cans in South America, where the drinks market is showing good growth. The market should also receive a boost from Brazil hosting the football World Cup in 2014 and the Olympic Games in 2016. India is another market being targeted.
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Compared with the US, where people on average consume one can of beverage per day, Indians consume on average just one can per year. As the consumption of canned drinks closely tracks the growth in GDP per head, Rexam hopes for strong growth in India as people become wealthier. Changes in the drinks market are also helping.
Drinks makers now like to sell their products in different types of can to distinguish them. This strategy is most prevalent in areas such as energy drinks. This is driving the demand for speciality cans and products, such as aluminium bottles. This is good news for firms like Rexam, as they can charge more money for speciality cans than standard ones. That should improve profit margins.
Rexam’s profits are sensitive to changes in the world economy, shifting exchange rates and the cost of metal. Yet it looks a decent investment. Its finances are in good shape while profits and dividends are expected to grow over the next few years. Rexam shares trade on just over 11 times 2013 forecast earnings, while offering a prospective dividend yield of 4%.
The numbers: Rexam (LSE: REX)
Share price: 472p
Market cap: £3.7bn
Net assets (June 2012): £2.3bn
Net debt (June 2012): £1.4bn
P/e (current year estimate): 11.1 times
Yield (prospective): 4.0%
Interest cover: 5.7 times
What the analysts say
Average price target: 534p
G Chipchase (CEO): 151,596
D Robbie (FD): 66,992
S Chambers (chairman): 27,000
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