European plastic packaging leader RPC (RPC.L) is stepping up investments to take advantage of strong demand in China, betting that its scale and technological know-how will allow it to take share from rivals even as recycling regulations bite.

However, shares in RPC were set for their worst day in a decade as the investments hit free cash flow and RPC said it would spend to expand manufacturing of its products, which include bottle caps and industrial chemical containers.

Full-year free cash flow fell 4 percent to 229 million pounds ($307 million), the company said on Wednesday. Capital investments of 242 million or 6 percent of revenues were above its guidance for 230 million and were also set to rise to 250 million this year.

“Yes, we are investing a significant amount of capex but I think it’s in the higher added-value return,” Chief Executive Pim Vervaat told analysts on a call. “I think we can take share from less well invested and less innovative competitors.”

Shares in RPC fell as much as 17 percent to a more than two-year low. By 1045 GMT they were trading down 12 percent, at the bottom of the pan-European Stoxx 600 index and were on course for their worst day since October 2008.

“The plastics industry is one in which governments and the public are newly focused, there are some questions about underlying growth,” said Paul Moran, Head of Research for Northern Trust Capital Markets, maintaining a”sell” recommendation on the stock.

NEW RULES

Packaging markets are going through upheaval after China this year stopped accepting some lower-grade materials for recycling, while tighter regulation looms in Europe and elsewhere.

UK-based RPC said none of the products it makes will be restricted by a planned European Union directive or British restrictions on single use plastics, and that little immediate impact was anticipated.

RPC Chairman James Pike added that customers were not moving away from plastic but were showing increasing interest in recyclable products, playing to its design strengths.

Among other projects, RPC is investing 35 million pounds in a new factory in Shanghai, as Chinese demand for food and medical packaging soars, sending RPC’s sales in China up by an average of 26 percent a year since 2014/15.

RPC, which has spent over $1.5 billion on acquisitions in the past two years, said it would evaluate buying opportunities, while it identified businesses for sale that do not fit its focus on high-value recyclable plastics.

The businesses slated for disposal are a European automotive injection-moulding unit, its U.S. Letica food-packaging business, which is primarily paper-based, and a metal-based spirits bottle-top business. The three have a total of 209 million pounds in revenues.

RPC reported a 38 percent jump in annual adjusted operating profit, in line with analysts’ expectations.

RPC said it aimed to improve adjusted operating profit of its core businesses, including its recent Nordfolien acquisition, by at least 50 million pounds by 2021, and for its organic revenue to grow faster than the wider economy.

 

Source: reuters.com

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