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Mid-cap star stands by RPC despite plastics backlash

Mid-cap star stands by RPC despite plastics backlash

AXA Framlington UK Mid Cap manager Chris St John remains positive on his fund’s largest investment in RPC Group (RPC), in spite of the growing backlash towards plastic packaging.

UK mid-cap RPC is one of Europe’s largest suppliers of plastic packaging. Over the past six months, its share price has come under pressure as a result of negative sentiment towards the impact of plastic packaging on the environment, as well as the company’s ambitious acquisition strategy.

Over the past five years, RPC has acted as a consolidator in the sector. It is a strategy that has broadly driven growth, but has also attracted criticism in recent times. For example, Aviate, the broker, published a short note on RPC last year, which questioned the return on invested capital achieved through its mergers and acquisition activity. The broker also claimed that it was difficult to determine RPC’s organic growth numbers.

As a result, many investors got spooked and started to sell down their positions. Citywire AA-rated St John acknowledged that the acquisitions had led to an increase in exceptional costs.

‘Unfortunately this muddies the water of what the underlying returns are for the business and inevitably the cashflow conversion gets affected. Management have altered their business model, at least in the short-term, and the acquisitions have fallen away.

‘I think what we will get going forward is a demonstration of the cashflows and underlying organic growth, which will not be monumental but should be GDP plus,’ he explained.

While negative sentiment continues to grow against the use of plastics, St John pointed out that everything RPC made could be recycled and around 10% of what it produces came from recycled plastics. He added that the company did not produce one-use straws or cups, which are currently under fire.

‘It is up to the management to prove their case from a fundamental perspective. What we need to see is increased recycle rates and individuals incentivised to do that,’ St John added.

While initiatives in Germany have been effective and the plastic bag charge in the UK has changed behaviours, St John hopes to see more innovation from the plastic companies as well. He pointed out that RPC had a number of initiatives under way. For example, it has developed a non-petrochemical plastic that is fully combustible.

On the Beach eyes expansion

Elsewhere in the portfolio, St John believes the future looks bright for online travel agent On The Beach. While competitors like Thomas Cook are saddled with overheads relating to their high street branches, On The Beach has lower operational costs and capital to invest in its systems and marketing. The company is benefiting from growing numbers of consumers booking their holidays online.

‘This business has a chance to internationalise, which bodes well for future growth and cashflows as well,’ he added.

On The Beach (OTB) also represents a favourite for Colin McLean and Margaret Lawson in their SVM UK Growth fund. They expect to see brand awareness increasing and repeat customers becoming loyal advocates.

‘This means the proportion of customers who come direct to the On The Beach website increases, reducing the group’s need to spend on online advertising,’ they said.

Within the AXA Framlington UK Mid Cap fund, On the Beach taps into the theme of changing consumer dynamics. Other themes include automation, clean technology and the connected consumer, which touches on e-commerce, financial technology and artificial intelligence.

Over the five years to the end of January, the AXA Framlington UK Mid Cap fund has returned 103.7%, which compares to 96.4% by the average fund in the UK medium companies sector.

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