South African paper and packaging business and recycler Mpact remains “firmly anchored” in its purpose of making a difference by providing customers with sustainable packaging and giving effect to the circular economy through its integrated business model.
CEO Bruce Strong said on August 5 that the company’s results for the six months ended June 30, showed “tremendous resilience”, delivering “pleasing financial results for the first half of the year”.
The group’s operating profit increased by 165% year-on-year to R337-million and return on capital employed (Roce) increased to 15.6%. Underlying earnings a share increased to 121c, compared with 9c in the same period last year.
Strong cash flow from operations resulted in net debt decreasing to around R1.4-billion, from R1.9-billion as at June 30 last year, despite having returned R257-million to shareholders in January 2021 through a successful share buyback.
CFO Brett Clark commended the company’s strong balance sheet and said the company had “done well” in managing its working capital, which he added generated a lot of cash for the company, which would help it to invest in more projects going forward.
Mpact’s trading for the six months was robust, with underlying profit having exceeded pre-pandemic comparatives in both the plastics and paper businesses.
Group revenue for the six months increased by 16.3% year-on-year to R5.9-billion. The paper business benefited from improved global containerboard prices and increased local sales at higher average prices, while the plastics business also experienced increased demand in most sectors.
Supply chain constraints across most sectors put pressure on raw material availability and costs, but Mpact managed to recover paper costs, which increased dramatically during the period, partly offsetting the benefits of higher containerboard prices.
Similarly, the plastics business was negatively impacted by higher polymer costs and the timing of passing these cost increases on to customers.
Overall, Mpact’s strong financial position and proven strategy enables it to take advantage of the significant changes in the global economy as it begins to recover from last year’s slump.
Since the start of the Covid-19 pandemic, more multinational companies have begun looking towards local manufacturing to mitigate the ongoing risk of imports and supply chain interruptions. Strong said the pandemic highlighted that, based on a company’s procurement practices, it might “be putting the business at significant risk”.
This increased drive to support local manufacturing bodes well for Mpact, which is a local supplier of sustainable products.
“Through our innovative products, we are able to offer our customers things that weren’t available three years ago. One good example is our paper punnets, which were not even on the market two or three years ago and are now gaining great traction for fruits such as grapes, berries, strawberries, mushrooms and all those kinds of things,” Strong told Engineering News.
Commenting on the recycling division’s involvement in the circular economy, Strong said that while South Africa has been a good paper recycler for 50 years, the commitment to recycling is only now gaining traction.
“What we’ve seen recently is people [being] more committed to [recycling], but it has to be said that the social media aspect, particularly, elevates it to a point where you’d think the whole world is thinking like that, but our experience is that only 10% or 15% of people actually think seriously about recycling, the rest are sort of just complying with the systems,” he commented.
This leaves a burden and the responsibility on producers, which is now being enacted legally in South Africa, to motivate and get people to recycle through systems that are easily accessible.
Meanwhile, in order to take advantage of the increase in customer demand, Mpact’s board of directors recently approved over R500-million in investments to support the group’s growth and innovation, improve margins, and ensure the resilience and sustainability of operations.
Mpact will, with this investment, build four new facilities – three factories for manufacturing packaging materials and recycling, and one for use as a customer service centre.
A fifth major project is the installation of about six solar installations across the group’s premises totaling 6.5 MW.
The investment intends to deal with customer requirements, putting the company in a good position to leverage the innovations brought about in the business and to ensure the sustainability of both the business, and contributing to the group’s overall sustainability drive.
“At a time when companies are really battling to find opportunities, we’re very fortunate to be aligned with the fruit sector in South Africa, which is growing quite nicely. Our customers in that sector have great ambitions, and we feel that it is necessary for us to align our own investments with theirs so that they are not left short of packaging when the new plants come on stream,” Strong enthused.
Facilities will be based in KwaZulu-Natal, the North West, Limpopo and Gauteng.
Revenue for Mpact’s paper business was R4.6-billion, or 15.8%, higher than the same period last year, with sales volumes 12.7% higher year-on-year.
Paper manufacturing benefited from strong local containerboard demand during the period, improved production performance and a favourable product mix owing to low margin rolled pulp not being produced nor sold in the current period.
The recovery in the industrial and quick service restaurant sectors and the continued growth in the agricultural sector benefited the paper converting business.
A good growth in citrus volumes is anticipated in the second half of this year, despite the late start to the season.
The paper business’ underlying operating profit was R347.1-million, up 88.6%, owing to improved trading and operational efficiencies.
A second interim payment of R25-million relating to the Springs Mill electricity supply interruption in 2020 has been approved by insurers and included in the interim results as sundry income.
Revenue in the plastics business, meanwhile, increased by 18.3% to R1.3-billion with a strong recovery in sales volumes.
Gross profit increased by 23% owing to improved sales and a stock write-down in the prior comparable period which was not repeated.
Plastics showed a significant improvement in profitability, with underlying operating profit increasing to R34.6-million from a loss in the prior period of R17.7-million owing to good improvements in most businesses.
Net finance costs of R67.8-million were lower by 28.5% compared with the prior comparable period owing to lower interest rates and average net debt over the period.
Headline earnings a share increased by 112.1c to 120.5c, while basic and underlying earnings a share increased by 111.8c to 120.8c.
Robust demand experienced in the first half of this year is expected to continue across most businesses but may be partially offset by the recent unrest experienced in KwaZulu-Natal and parts of Gauteng, as well as supply chain constraints across most sectors.
Margins are, however, expected to improve as raw material cost increases are recovered through increases in selling price.
Strong told Engineering News that Mpact’s operations in KwaZulu-Natal were closed for eight days during the civil unrest period, which resulted in lost gross profit of about R20-million.
In addition, Strong said on Thursday that current indications are that gross profit may be negatively affected by a further R20-million owing to lost sales which may be partially recovered by year-end.
The was no damage to property, and no injuries to employees were experienced, with Strong commending Mpact employees in those operations for having done “a remarkable job and [for having] showed great resilience in making sure staff and contractors, and property, were protected”.
Customer demand has tapered off as a consequence of the civil unrest, and while some businesses are expected to recover in the months ahead, Strong lamented that about 10% of Mpact’s customers’ national volumes were taken out during the civil unrest.
Mpact’s operations, on the other hand, are all fully functional again.