Investor Paul Hill picks the best share tip from the week’s press and brokers’ reports. This week: a stock set to benefit from the trend towards more recycling and biodegradable packaging.
Tip of the week: Rexam (REX), tipped as a BUY by Evolution Securities
In the past decade Rexam has gone from being a sprawling conglomerate to the world’s largest can producer, selling more than 50 billion cans each year – 7.6 for each person on the planet. The beverage sector accounts for 78% of its £3.3bn annual sales; the remainder comes from plastic packaging, where it is the world’s number four player. It has around 100 factories in more than 20 countries and employs 24,200 staff. This huge geographical reach creates substantial economies of scale and allows Rexam to offer packaging on both a global and regional basis to its international customer base, which includes household names such as Cadbury-Schweppes, Coca-Cola and SABMiller.
Rexam is also well placed to gain from the trend towards greater recycling and use of biodegradable packaging. Ever-tighter laws mean that companies with sufficient size and resources to invest in new environmental technologies should be able to outgrow the wider market. Last year, organic growth rose by more than 10%, as Rexam gained market share in North America and the World Cup buoyed sales in Europe and South America. But record turnover did not mean record earnings unfortunately, as profits were dented by higher aluminium, freight and energy costs, a weaker dollar and lower margins on new contracts. However, earnings per share of 40.6p and the dividend of 19p were up 3% and 5% respectively on 2005.
So what about 2007? The year began with the sale of Rexam’s glass-bottling unit to Ardagh for e660m (£449m) in March (at 11 times operating profits), strengthening the balance sheet. At last week’s update, the board said the group was set to hit City forecasts, excluding the impact of a £15m one-off charge relating to a strike in the US. Price rises have been passed on in Europe amid stubbornly high aluminium costs.
Consensus opinion is that 2007 will be challenging, with earnings per share slipping to about 36.0p, but recovering to 40.8p in 2008. These estimates look readily achievable; underlying earnings per share has averaged 37.1p over the past five years. As for risks, Rexam is exposed to changes in raw material and energy costs, consolidation among suppliers and customers and a weakening dollar. However, the core business is solid, with leading positions in its global markets. Moreover, the shares trade on a 2008 p/e ratio of less than 14. With the potential for future earnings upgrades, together with the possibility of becoming a takeover target, the stock is a long-term buy for the more cautious investor.
Recommendation: Long-term Buy at 526p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments