JSE-listed paper and packaging company Mpact on Wednesday reported a double-digit uptick in earnings for the first half of the year, but warned that the continued subdued economic environment could make the upward trend hard to sustain in the second half of the year.

The company’s headline earnings a share surged 46.9% to 134.4c during the six months to June, while basic earnings a share expanded 47.4% to 135.3c on the back of an improved trading performance and a lower effective tax rate over the prior corresponding period.

The effective tax rate contracted from 30% in the six months to June 2014 to 21.1% in the period under review, owing to the recognition of deferred tax on previously unrecognised tax losses.

During the first half of the year, Mpact’s operating profit increased 26.8% to R342-million, with its operating profit margin increasing to 7.8% from the 6.8% posted in the first half of the prior year.

The company’s total comprehensive income increased to R222.6-million in the interim period to June 30, from R151.7-million in the corresponding six months the year before.

“The results reflect an improved performance in plastics following the successful restructure of the fast-moving consumer goods (FMCG) business during 2014, good volume growth and a better operating profit margin, while the paper business once again delivered steady growth underpinned by increased sales to the fruit sector,” said Mpact CEO Bruce Strong.

Mpact’s paper unit delivered operating profit of R315.4-million in the first half of the year, a 12.4% rise on the prior corresponding period owing to higher selling prices and a favourable product mix, which were partially offset by increased raw material costs.

A favourable product mix and cost savings resulted in a 98.9% jump in the first-half operating profit of the company’s plastics business to R87.3-million, with the operating profit margin having increased to 7.6% from 4.1%.

Group revenue increased 10.8% to R4.4-billion for the six months to June, mainly as a result of volume growth, a favourable sales mix and higher selling prices.

The paper business generated revenue of R3.3-billion, up 12.1% on the prior period owing to organic sales volume growth of 2.4%, while the plastics business increased revenue by 7.3% to R1.1-billion on the back of good volume growth in all sectors, other than the FMCG unit, which declined following the restructuring last year.

Despite the improved performance in the six months under review, the continued subdued economic conditions and the level of raw material, labour, electricity and administered services cost inflation, could “make it difficult” to maintain similar levels of volume growth in the second half, Strong pointed out.

However, speaking to Engineering News Online, he said the company hoped to minimise the impact through several interventions, such as the establishment of a R350-million polyethylene terephthalate recycling (rPET) plant and the R765-million upgrade of its Felixton mill, in KwaZulu-Natal, in addition to other investments in the recycling and corrugated businesses, and continued productivity improvements and cost-saving initiatives across its operations.

The company had committed R1.1-billion in capital expenditure, with R682.5-million to be spent in the next 12 months and the balance over the next one to five years.

The rPET project, which kicked off a year ago and was currently in its start-up phase, and the first phase of the Felixton mill rebuild, which started in March last year, were both commissioned on time and within budget.

The company would now move to obtain customers’ approval for the use of Mpact's rPET in the production of bottles, while the second phase of the Felixton mill upgrade was now under way and on track to be completed in 2017.

The costs associated with the start-up of the rPET plant and Phase 1 of the Felixton mill rebuild was expected to also impact second-half earnings.

Mpact declared an interim gross dividend of 30c a share.