Midas: Rexam | Griffin Mining

By THIS IS MONEY
Updated:

 

The Financial Mail on Sunday's respected stock picker tips a struggling drinks can giant. Last year was a difficult 12 months for packaging group Rexam, the world's biggest drinks can manufacturer, as it was buffeted by high commodity prices and the weak dollar.

The troubled times naturally took a toll on its share price. But with hopes that 2008 will see a turnaround in fortunes, that price now looks quite attractive.

The key blow to Rexam profits last year was the rising price of aluminium, the main raw material of its can-making business, which supplies PepsiCo and Red Bull among others. Aluminium was on average about £50 a ton more expensive in 2007 than in 2006.

The weak dollar meant its large American earnings were worth markedly less when converted into sterling. The combined effect was that while sales rose 11% to £3.6bn, underlying profits before tax fell by 7%.

So why should this year be any better? First Rexam has taken steps to reduce the damage done by high aluminium prices. It has struck new deals with some of its customers, allowing it to pass on more of the rise in raw material prices.

At the same time, it has taking out hedge positions in the commodity, which will help to insure against those price rises it cannot pass on.

The effect is that this year Rexam should be pretty much immune to commodity price fluctuations. The wisdom of that move is all the more clear given the 30% rise in aluminium prices so far this year. But the effect of the falling dollar is harder to counter. However, as UK interest rates are cut there is the chance that sterling will continue to drift off its highs against the dollar.

Market ups and downs aside, Rexam has also struck some key deals in the last year that should stand it in good stead, offering both significant growth opportunities and more of a defensive stance against the expected slowdown in developed economies.

Its biggest deal was buying plastic packaging division of Owens Illinois for £920m. The group expects to reap cost savings of £25m a year from integrating this with existing operations.

Its other key step was buying Russian drinks can maker Rostar for £149m last summer, giving it in one swoop a 90% share of the drinks can market in Russia, a sector that is growing extremely rapidly.

While not recession-proof, Rexam's business is not in the front rank of likely economic cutbacks. At the same time, its growth opportunities in emerging markets such as Russia and the savings it may be able to reap from its acquisitions should provide bottom-line growth, even through tough times. Analysts are forecasting profits will jump to about £319m this year.

•• Midas verdict: Rexam is well placed to bounce back from last year's difficulties and to keep growing thanks to its acquisitions strategy. Recent weakness in its share price makes the stock look slightly undervalued at 408¾p or 12 times forecast earnings. Its forecast dividend of 21p, up from 20p for 2007, represents a yield of about five per cent.

Rexam may not be about to set the world on fire, but at the current share price it is - as far as it can be said of any company these days - a defensive investment for the long term. Buy.

City coverage and share tips

This is Money carries breaking City news throughout the day. Bookmark Companies & Markets and try these markets links...

Newspaper graphic and pen

MIDAS UPDATE

It has been a bumpy ride for investors who followed Midas's tip in July 2006 to buy into zinc and gold extractor Griffin Mining at about 83p a share.

Nine months later, the shares had soared to 122p - a 48 per cent jump - and many investors may have opted to take their profits there and then.

Griffin, which operates a mine in north-east China, held its value through most of last year, but in the autumn the shares took a turn for the worse and by late last month had fallen back to a low of 65p.

The slide was caused by falling zinc prices and Griffin's announcement that it was holding back stocks it had mined rather than selling into a weak market.

But at the time of our first recommendation we highlighted the robust fundamentals of Griffin. Unlike most small mining groups, it is not only profitable, it also has cash in the bank.

The fall to 65p was always unjustified. And last week Griffin delivered yet more good news as it announced a massive new source of gold, silver and lead, all close to its existing mine in the Chinese village of Caijiaying. The news sent the shares soaring and they closed last week at 77¾p. So those who bought and held since 2006 are almost back to where they started.

Resist the temptation to quit. The same fundamentals that drove Griffin higher last year are still in place.

There are other prospects being investigated by Griffin in China and the group is the subject of perpetual takeover rumours.

And always remember that Griffin has £48m in cash or liquid investments, which represents a remarkable 18p per share.

•• Midas verdict: Hold on to Griffin as 100p a share or more is easily achievable again.

Most watched Money videos