Rexam Plc

 Rexam roars

Consumer packaging company Rexam (LSE, REX) took big strides in 2011. Not only did demand for beverage cans prove resilient during the downturn, the group’s emerging markets exposure boosted business returns which helped profits increase at a faster rate than sales.

With the group’s Plastics Packaging division having seen less success than the cans business Rexam is electing to sell-off its personal care business – a key constituent of the division. This will increase the focus on the group’s Beverage Cans business division as Plastics Packaging will generate only around 10% of group revenue. 

The stock market understandably cheered the move, even before the potential sale price is known.

How much this would bring in isn’t clear but one estimate has the figure at over £300 million.  The money could be returned to stockholders as seems likely or used for acquisitions.

What is clear is that the Plastics Packaging division and the Beverage Can division have seen diverging fortunes in 2011.  Plastic Packaging saw a 2% increase in organic sales, a fall in organic operating profits, a fall in margins and a lower return on net assets at 23.3%. Beverage Can on the other hand saw a 4% increase in organic sales, an increase in operating profits and margins as well as a jump in return on net assets to 31.6%. 

Looking at Beverage Cans in more detail and Europe was surprisingly the strong performer.  Volumes were up 6% in Europe while South America saw flat volumes and North America saw volumes fall by 14%.  Excluding standard cans the volume in North America was up 5%.

The key across these markets was speciality cans for energy drinks, iced teas and beer.  In Russia speciality cans saw 10% growth driven by energy drinks while in the US speciality cans were up 16%.  Thus excluding standard cans North America volumes were up 5%.

So on the volume side beverage cans saw relatively modest growth.  Price increases helped boost sales and in combination with efficiencies led to the 15% organic profit growth.

The overall sales for Rexam were up 4%, the operating profit jumped 8%, lower finance costs saw EPS jump 15%. A mark of confidence was that the dividend increased by 20% as this was a larger rise than EPS. Importantly Rexam has continued to lower net debt which was a key factor behind the strong dividend increase. 

With a greater focus on cans the group will be in a business which is less economy dependant than plastics.  This is as plastic packaging is typically used for discretionary items like beauty products.  By contrast beverage cans are more resilient which helps explain the divergent performances in 2011.

Long-term growth in its markets is targeted to be above levels of GDP growth.  Within this a key part of the Rexam story is the exposure to emerging markets which now make up 32% of group sales.  Key countries are Russia, India, Egypt, Brazil and Mexico.

This article was produced by Senior Research Analyst, Andrew Latto.