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Mpact looks beyond headwinds

Invests for long-term growth.

Paper and packaging company Mpact continues to invest in its South African operations, commissioning two major projects in 2015, despite the sluggish economy and low-growth rate.

While these projects are aimed at enhancing the group’s competitive position within the paper and plastics markets, the investments have yet to yield an improvement in operating margin.

In fact after a better performance in 2015, underlying headline earnings per share fell 29.6% to 95.2 cents. This follows mixed performances in its paper and plastics divisions, says MD Bruce Strong.

Mpact’s R350 million recycled polyethylene teraphylate (rpet) operation, which is part of the new Mpact Polymers business, was commissioned in July 2015 on time and within budget. However it only received the necessary European approvals to use its material in the packaging of food and beverage products in September and approval from Coca-Cola to use the product in the bottling of its brands was only obtained in February this year.

“This investment is still in a start-up phase and this undermined our performance in the rest of the plastics division,” Strong says.

Mpact’s more mature plastics converting business, which makes plastic crates for the export of fruit and wheelie bins for refuse removal among other things, performed better as it is sheltered from the travails of the local consumer economy to a degree.

This ensured that revenue in the plastics business increased by 10.2% to R1.3 billion, thanks to volume growth of 5.6% and higher selling prices. However operating profit declined 20.1% to R69.7 million as a result of the losses within Mpact Polymers.

Strong is not too disheartened by this. The new plant has potential, he says. Once it is operating at capacity it will remove about 30 000 tons of plastic bottles from landfill sites, the equivalent of 186 000 m(3) of saved landfill. At present roughly 55% of all plastic bottles are recycled. He estimates that by the early 2020s this will reach 70%.

“There is money in beneficiation of recyclables. It’s not billions, but it is there. What this shows is that if government facilitates access to recyclables (e.g. by providing access to land for buy-back centres), the private sector will invest.”

Similarly, in the paper division, while phase 1 of the R765 million Felixton Mill upgrade was commissioned on time and within budget last year, the mill is not yet operating at capacity. Phase 2 of the project is on schedule to be completed during 2017.

“We faced considerable competition with two integrated competitors increasing containerboard production, replacing products previously supplied by Mpact,” Strong says.

Revenue in the paper business increased by 5.6% to R3.5 billion with average selling prices increasing 5.8% and sales volumes declining 0.2%.

Paper business volumes were supported by sales from the recently acquired Remade business which is a collector and trader of recyclable material and which complements a number of initiatives by Mpact Recycling to expand its own collections of paper and plastic.

Thus the underlying operating profit in the paper division decreased by 7.4% to R292.1 million on the back of lower production and sales volumes.

Despite the current imbalance in domestic recycled containerboard supply and demand, Strong says management remains confident in the rationale for the Felixton mill upgrade. 

Overall group revenue rose 6.2% to R4.7 billion and operating profit declined by 6.0% to R321.7 million.

Impact share price

Mpact has made full use of government incentives and support measures that are available to manufacturers – qualifying for grants offered through the Department of Trade and Industry’s manufacturing competitiveness enhancement programme and for tax allowances under section 12i of the Income Tax Act.

In addition in 2015 the KwaZulu-Natal Growth Fund invested R200 million in the Felixton Mill upgrade project in the form of debt with an eight-year term at a fixed interest rate. And the IDC supported the development of Mpact Polymers through a minority shareholding and also as a provider of debt funding.

“Public-private partnerships are important,” Strong says. “People are pessimistic – sometimes justifiably – but you have to take a step out of the boat and have a shot at investing. We know our business and we know the market and we are happy to invest.”

He estimates that while short-term headwinds remain, conditions should improve within 18 to 24 months.

Following the recent capital expansion the balance sheet remains healthy with gearing reduced to 33.8% during the period.

Return on capital employed fell to 16.7% from 17.9% a year earlier. However this is still above the 15% benchmark set by management.

The company has declared an interim gross cash dividend of 30 cents per share.

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