Should I Buy Rexam plc?

Harvey Jones reckons the market has been too tough on tin can maker Rexam plc (LON: REX)

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drinks cansI’m shopping for shares, and I’ve found plenty of goodies for sale. So, should I pop Rexam plc (LSE: REX) into my shopping basket?

Rexam canned

Last time I looked at Rexam, I described it as a tin can operation. Because that’s exactly what it is. The FTSE 100-listed stock is the world’s largest producer of beverage cans, with Coca-Cola, Carlsberg and Red Bull among its clients. But after looking inside the tin, I decided the stock wasn’t to my taste. Given tough trading conditions, notably in Europe, it looked fully valued at 15 times earnings. Should I buy it today?

It looks like I called this stock right. Rexam is down 5% in the past 12 months, against a 6% rise for the FTSE 100 as a whole. The market was unimpressed by its recent full-year results, despite a 6% rise in pre-tax profits to £339 million, and a 13% rise in underlying earnings per share. Volumes in Europe and South America were “disappointing”, management admitted, although the company did claw back market share in North America. Sales grew just 1%. The share price fell 9% on the day.

Plenty of tin

That looks harsh, especially given Rexam’s generous treatment of investors. It hiked its total dividend 14% to 17.4p a share. The stock now yields 3.5%, in line with the FTSE 100 average. This dividend uplift followed its early announcement that it would return £450 million to shareholders, after agreeing to sell the majority its healthcare business for £490 million in cash. 

Rexam is narrowing its focus to what it does best: beverage cans. It is also looking to expand its operations by acquisition, including taking a 51% stake in Saudi Arabian can maker United Arab Can Manufacturing, which cost $122 million. This should help it focus on its “three Cs strategy” of cutting costs, generating cash and boosting the return on capital employed, which reached 15% last year, hitting management’s target.

Aluminium illumination

Continuing weakness in Europe remains a worry, as does Russia, with a ban on sale of beer in kiosks knocking 8% off the beer can market. Social unrest in Egypt and Turkey also hit sales. Rexam’s exposure to aluminium price volatility has been overstated, however, given its extensive use of hedging.

I’m slightly concerned about its exposure to a single commoditised product, the humble tin can. Emerging market turbulence is also a worry, but in the longer run, its exposure to Russia, Brazil and China has to be a plus. It is also looking to break new ground in Dubai.

Rexam is an unsung hero of the FTSE 100. At 14 times earnings, it is a little cheaper than it was. Yet it has a massive market to aim at, the emerging middle class, and this summer’s World Cup will help. Citigroup has just lifted its target price from 575p to 590p and kept a buy recommendation. At today’s price of 499p, and with management keen to up its dividend, Rexam looks like a buy to me as well. It’s in the can.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones doesn't own shares in any company mentioned in this article.

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