Despite subdued gross domestic product (GDP) and consumer spending growth in South Africa during the first six months of the year, which drove an “intensely competitive” trading environment, JSE-listed Mpact has grown its profits, lifting basic headline earnings a share by 25.3% to 76.7c apiece for the period ended June 30.

The paper and packaging company reported on Wednesday that the weaker rand had provided some relief, improving the relative competitive position of the group’s manufactured products, compared with imported substitutes, and supporting growth in packaging for fruit exports, which remained robust during the period.

Revenue increased by 9.7% to R3.5-billion for the six months, attributable chiefly to volume growth in plastics and higher average selling prices, while external sales volumes increased by 2.5% over the same period last year.

The company’s underlying operating profit rose 6.1% to R236-million, while an under-recovery of raw material price increases in certain products, most notably plastic polymers, pulp and chemicals, led to Mpact’s operating profit margin decreasing to 6.7% from 6.9% in the comparable 2012 period.

“The raw material increases are attributable to a global rise in commodities and, to recover that in the local market, given the local growth, has been quite a challenge,” CEO Bruce Strong told Engineering News Online.

Return on capital deployed improved from 14.1% in the prior comparable period to 15.5%, while net debt, as at June 30, increased to R1.48-billion on the back of working capital outflows at the end of June.

Divisional Performance

Revenue for the group’s paper business for the six months rose by 6.9% to R2.55-billion, while external sales volume growth of 1.3% reflected the underlying market conditions.

Average selling prices in this division were influenced by good sales volume growth in higher value products, such as white-top kraft liner and fruit boxes, yielding a favourable product mix variance.

Sales from this segment to the agriculture and fruit export sector increased by around 7.6% on the back of a substantial upsurge in citrus exports and a marginal increase in grape exports.

Underlying operating profit in the paper business increased by 8.9% to R251.3-million on the prior period as a result of stringent cost control and higher average selling prices.

Meanwhile, Mpact’s plastics business increased its revenue by 17.7% to R969-million on the back of sales volume growth of 14.1%, of which about 1% was owing to acquisitions. 

“The key drivers of the revenue improvement in plastics were the preforms and closures businesses, which saw good sales growth into the beverage sector. This is compelled by a shift in preference from glass to polyethylene terephthalate by the big bottlers,” Strong commented.

Robust fruit exports into Europe and other markets further bolstered the performance of this segment, which provides plastic packaging for agricultural exports.

The preforms and closures business benefited from good growth in the beverage sector, while growth in the agricultural sector benefited the styrene and bulk bin businesses.

However, underlying operating profit for the plastics division decreased by 7.6% to R34.3-million owing primarily to the under-recovery of raw material cost increases during the period.

The company declared an interim gross cash dividend of 22c, payable on September 16.

Looking ahead, Mpact expected local GDP and consumer spending growth to remain subdued in South Africa and anticipated that cost increases for labour, electricity and other administered services would be higher than inflation for the foreseeable future.

On the upside, the weaker rand was expected to improve the group’s competitive position relative to imports, although the benefits might be offset to some extent by related increases in input costs such as plastic polymers, paper, pulp, transport and chemicals.

Strong said that, while the group expected trading conditions to remain highly competitive in the second half of the year, its focus would remain on ensuring good profitability across the product range and return on capital being employed to enable continued investment in its competitive manufacturing base.

“We will also look to further entrenching our strong market positions, productivity improvement and finding new business opportunities. We remain confident that our strategy and resilience, positions the business well in the sectors in which we operate,” he commented.

Strong confirmed that the company continued to look for possible acquisitions and “bigger opportunities” in technology and lower-cost production, but added that the company had a “conservative” approach to possible expansion.

“While the rand has been a help, it is only a short-term help and all manufacturing companies have to look at the fundamentals of their competitiveness before exploiting possible opportunities,” he said.