Yes, We Can! Says Rexam

Published in Company Comment on 23 February 2011

The world's biggest can-maker reveals record results, with profits up 45%.

As the world's largest maker of beverage cans, FTSE 100 firm Rexam (LSE: REX) is seen as a key consumer bellwether.

Yes, we can!*

As well as food and drink cans, the global consumer-packaging company supplies plastic packaging to the healthcare, pharmaceutical, personal-care and household-care markets.

Thus, by wrapping the world's goods, Rexam gives a broad-brush picture of global consumer brands and trends. Hence, analysts pounced on its 2010 results released this morning.

The good news is that Rexam's sales rose 2% in 2010 to just shy of £5 billion. This revenue rise, plus cost-cutting savings of £88 million, boosted underlying pre-tax profit by an impressive 45% to £412 million.

Thanks to a return to global growth, both of Rexam's key arms performed well in 2010. Its beverage-cans division (responsible for 77% of group operating profit) reported organic profit growth of 25%. Similarly, this key performance indicator rose 16% at its plastic-packaging arm.

These improving trends helped free cash flow to jump 9% to £316 million which, in turn, allowed Rexam to trim its net debt by £150 million to £1.7 billion, down 8%.

Shares slip

Underlying earnings per share (EPS) climbed by 29% to 32.8p, allowing Rexam to boost its full-year dividend from 8p to 12p. No doubt this dividend hike of 50% will be welcomed by Rexam's shareholders.

Despite these record results, Rexam's share price has stumbled, tumbling 5% to 350p and trimming its market cap to £3.1 billion. Still, even after today's slide, Rexam's share price is up a quarter (25%) in the past 12 months, versus a 12% rise in the FTSE 100.

Consumers and cans

Clearly, despite falling consumer confidence in the face of austerity measures, consumers aren't cutting back on fizzy drinks and other canned goods.

Indeed, multi-pack promotions and discounts gave a sales boost to Rexam's clients' brands, such as Carlsberg, Pepsi and Red Bull. Notably, sales volumes rose 5% in Asia and Europe, following a disappointing 2009.

However, sales in Rexam's plastic-packaging division saw little growth in 2010, suggesting sluggish sales growth in the food and healthcare sectors.

Hence, Rexam -- which employs 23,000 workers in over 20 countries -- is pinning its hopes on higher growth in emerging markets, notably South America. Currently, emerging markets account for 30% of Rexam's sales, but acquisitions and new joint ventures may boost this proportion closer to 50% over time.

My kind of 'boring'

Rexam's chairman, Sir Peter Ellwood, described these results as, " excellent performance in 2010".

Graham Chipchase, CEO since January 2010, added, "...we will remain focused on increasing our return on capital, optimising cash and controlling costs, while making disciplined investments to improve our growth and returns over time. We expect 2011 to be a year of continued progress."

Of course, investors used to the racy, thrilling world of small-company shares would find Rexam something of a bore. But, Rexam has done well on its 'three Cs': cost control, cash optimisation and return on capital, bouncing back strongly from the global crisis of 2007/09. What's more, its fundamentals should prove attractive to conservative investors.

Based on a share price of 350p and underlying EPS of 32.8p, Rexam now trades on a price-earnings ratio of 10.7. This is a modest price to pay for a market-leading company with global reach. 

Likewise, its 12p dividend translates into a dividend yield of 3.4%, which easily exceeds the return on cash deposits.

Bubbles in tins

Personally, I like the look of Rexam's results and its turnaround over the past 12 months under its new CEO. Indeed, I may use recent share-price dips to squirrel away a few Rexam shares for my family.

While there may be bubbles forming in other sectors, notably mining, Rexam's investors can sleep easy, dreaming of the trillions of bubbles trapped inside Rexam-made cans!

* My apologies to President Obama for shamelessly copying his election motto.

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djpreston 24 Feb 2011 , 3:40pm

* My apologies to President Obama for shamelessly copying his election motto.

Shame how Obama didnt give credit to Bob the Builder for pinching his lines....

Luniversal 24 Feb 2011 , 7:32pm

"Underlying earnings per share (EPS) climbed by 29% to 32.8p, allowing Rexam to boost its full-year dividend from 8p to 12p. No doubt this dividend hike of 50% will be welcomed by Rexam's shareholders."

Actually Rexam cut from 20.4p a share in 2009, had a rights issue to bail itself out and will take a while to get the payouts back on track. Shareholders will need patience.

For a business that likes to sell itself as dull and reliable, there's been an awful lot of fiddling with the capital structure and making wrong moves since REX crawled out of the old Bowater group.

For now the yield is barely above the Footsie's. Recommending a share on the grounds that it yields more than cash deposits is absurd: cash is a short-term tactical parking place, equity investment (esp. in a labouring recovery play) is about waiting years for your rewards.

With debt standing at more than half the market value, interest rates set to take off and consumer demand in many sectors slack, REX's recovery may not be too rapid.

abrahamisaacs 25 Feb 2011 , 12:46am

What I don't like about REX is a £5bn turnover creating just a £400m profit before tax. They're selling at near cost.

RobinnBanks 27 Feb 2011 , 1:19am

I believe Buffett has stakes in Rexam, and if anyone can, he can can!
I also believe they can coke in Rexam cans, and Warren's canny on coke cans too! Pity it wasn't in France - we could have the Rexam can-can in Cannes!

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