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Should I Buy Rexam?

By Harvey Jones - Apr 11, 2013 at 2:47PM

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Harvey Jones weighs up Rexam.

I'm shopping for shares, and I've found plenty of goodies for sale. Should I pop Rexam (REX) into my basket?

It's in the can
If you're reading this while sipping from a can of drink, there's a good chance you are contributing to the profits of Rexam. This solid FTSE 100-listed stock earns most of its income by manufacturing drinks cans, and is one of the world's top five consumer packaging firms. Should I buy it?

I have developed a quiet respect for the unsung heroes of the FTSE 100, names such as distribution group Bunzl, outsourcer Serco, plumbing merchant Wolseley, and now can-maker Rexam. These companies may be low on glamour but they have quietly knuckled down to the admirable job of boosting sales, pioneering new markets and boosting shareholder value. Rexam is up 77% in the last three years and 29% in the past 12 months. That puts it nicely ahead of the FTSE 100 as a whole, which grew 11% and 14% respectively in that time.

Its full-year results for 2012 showed a 6% rise in beverage can volumes and 5% rise in operating profits to £456 million. Sales rose 2% to £4.31 billion, while adjusted profit before tax rose 1% to £418 million. There was good news for shareholders, with the board proposing a 6% hike in its final dividend to 10.2 pence, taking the total dividend to 15.2 pence for the year. Rexam is stripping out its non-core business to focus on beverage cans, a strategy that included the sale of its Personal Care business in December, which allowed it to return £395 million to shareholders.

While acknowledging "less than ideal" market conditions, chairman Stuart Chambers has highlighted Rexam's "underlying resilience", with disciplined capital spending and healthy cash generation maintaining a strong balance sheet. Its health care operation had a difficult year, largely due to one of its customers products coming off patent, with operating profit plunging from £65 million in 2011 to £48 million. But its return on capital employed (ROCE) looks healthier 14.7% in 2012, and Chambers says it is on course to hit its 15% target this year.

Tin cups
One of the key things I look for in a FTSE 100 company is exposure to fast-growing emerging markets. Rexam doesn't disappoint on that score, with a market-leading position in beverage cans in three out of the four BRIC countries, and a new Brazilian plant coming online just in time for both the World Cup and Olympics. In these troubled times, I also like its focus on cost savings, which helped cut group net debt from £1.2 billion to just £800 million. Although I'm concerned about its exposure to the cost of one single commodity, aluminum.

Rexam now yields 2.9%, against 3.3 for the FTSE as a whole, neatly covered 2.3 times. Earnings per share growth looks strong at 15% this year and 8% in 2014. For me, the figure that really stands out is its valuation. Trading at exactly 15 times earnings, it looks like the market has already priced this stock to perfection. Rexam does exactly what it says on the tin, but I just wonder whether it can pull out any surprises. Goldman Sachs recently lifted its target price to £6.12, up from £5.72, but remains neutral, and I'm feeling neutral as well.

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