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The Investment Column: Rexam looks set to be the complete package

Michael Jivkov
Thursday 26 January 2006 01:00 GMT
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Since the mid-1990s Rexam has been repositioning itself from an industrial conglomerate to a pure consumer packaging company. These days it is a global leader in the production of drink cans and a major glass packaging player in northern Europe.

The most recent trend at Rexam has seen it move to faster-growing areas such as plastics packaging in emerging markets, and this was highlighted yesterday by its latest acquisition. Rexam paid £42m in cash for FangXin, a Chinese manufacturer of lipstick cases, compacts and pumps.

FangXin is a fast-growing company, and has registered growth of about 30 per cent per annum in the past four years. It was no surprise to see City analysts applaud the deal. The acquisition will be earnings enhancing from the outset - Oriel Securities says it will add £19m to Rexam's sales in 2006 and £2m to profits.

By investing in emerging countries such China, which account for 15 per cent of total sales, the company hopes to cash in on the fast economic expansion they are enjoying and the accompanying rise in disposable income which most consumers experience.

Investors should expect further acquisitions along the lines of FangXin as Rexam has earmarked between £200m to £300m a year for deals. Nevertheless, the manufacture of drinks packaging - be it glass or can - is by far the biggest part of the company's business and is likely to remain so for a long while (it accounts for 80 per cent of sales).

Rexam makes good profits from aluminium cans, enjoying a 13 per cent margin which is impressive for what is in essence a commodity product.

Overall, Rexam is tipped to secure solid profits growth in the years ahead. For the year just gone, the City is expecting a pre-tax profit of about £315m, rising to £330m in 2006 and £367m in 2007.

The company is hugely cash generative, throwing off about £200m of free cash flow every year, and at yesterday's closing price of 506p, up 5p, it boasts a dividend yield of 3.5 per cent. A rating of 12 times the forecast earnings for 2006, falling to 10.8 times in 2007, is too conservative for a quality outfit such as Rexam. Buy.

Risky Russian operations cast doubt on Victoria

Shares in Victoria Oil and Gas soared 60 per cent, or 88p, to 234.5p, yesterday after the explorer said its West Medvezhye prospect in Siberia is a lot bigger than originally thought.

The independent reserve auditors DeGolyer & MacNaughton indicated that the group's site contains 5.5 trillion cubic feet of gas, 146 million barrels of gas condensate and 25 million barrels of oil.

To give readers an idea of just how significant in size this find really is - it is enough to satisfy the UK's gas-energy needs for 18 months. And there is a possibility Victoria will once again upgrade the size of its deposit.

The West Medvezhye project is not the company's only asset. It has an oil field in Kazakhstan which boasts 60 million barrels of oil valued conservatively at $200m (£112m). The site is forecast to start generating cash by the end of March.

Victoria raised £13m at 78p last month to fund its development, and says it will not need to come back to the market for more money in the foreseeable future. After yesterday's share-price rise, the company is worth about £230m and, given the asset it has in Kazakhstan and the potential of its Siberia prospect, this is a conservative valuation.

Victoria faces significant risks by operating in Russia. One of the biggest is its reliance on Gazprom, the state energy company, to transport its gas reserves to market. At present, Victoria has the support of the giant, which stands to make a tidy profit from transporting the group's gas through its network of pipelines. But should a dispute emerge between the two companies, Victoria will face an uphill struggle. A court battle against the powerful Gazprom is unlikely to end in Victoria's favour given the Russian government's dominance of the local judicial system.

Certainly, Victoria is one of the Alternative Investment Market's biggest oil and gas exploration successes. It listed on the junior market at 20p just 18 months ago, and since then its stock price has been pretty much vertical. But it is not an investment for widows and orphans. A speculative buy only.

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