Eshan Toorabally, the paper and forest products analyst at Goldman Sachs, is clearly in two minds about large plastic packaging and beverage can producer Rexam.

Since putting Rexam on the ‘sell’ list on 21 January and then marking it down further as a ‘conviction sell’ on 29 January the stock has risen 11% compared with the FTSE World Europe index. On 2 May Eshan removed Rexam from the conviction sell but kept his sell rating.

On 23 May Eshan finally capitulated upgrading the company from ‘sell’ to ‘neutral’. Admittedly his ‘sell’ argument was based on Rexam looking expensive compared with its peers. It trades on an adjusted 2008 estimated enterprise value/EBITDA of 8.6, which is above its five-year average of 7.8 and ahead of US peers Ball Corp on 8.2 and Crown on 7.6.

Eshan was also worried about Rexam suffering a profit slowdown. But the trading update on 1 May was surprisingly bullish, almost removing the ‘risk of an earnings miss’ when the company reports first-half profits on 30 July, says Eshan.

Rexam is up because its beverage can operation in Brazil and Europe is thriving. Sharp cost rises in aluminium cans are being passed on to customers or hedged. Indeed, Eshan says the main upside risk to his new 430p target price, compared with the old 385p one, is better than expected margin performance in the can businesses.

The main downside risk is Rexam being less able to recover rising resin costs in its plastic packaging division.

by Timon Day