South African paper and plastics packaging group Mpact is forecasting further improvements in the operating performance of its paper business in 2019 as recent capital projects are optimised and fruit volumes improve following the recent Western Cape drought.

In the short term, however, the group expects subdued growth and warns that its profit margins will be adversely impacted by the introduction of a carbon tax, as well as above inflation cost increases in electricity, water and other administered services. Mpact has 21 manufacturing operations in South Africa, Namibia and Mozambique.

South Africa’s energy regulator recently granted electricity producer Eskom a 13.8% tariff increase to be implemented on April 1, comprising a 9.41% hike related to the utility’s allowable revenue for the 2019/20 and a further 4.41% increase arising from an earlier adjudication of three Eskom regulatory clearing account applications.

CEO Bruce Strong said that, while the company was optimistic that recent actions by government would help improve growth prospects, Mpact’s immediate focus would be on securing the full benefits of its recent capital projects and turning around its underperforming plastics businesses.

The company reported on Wednesday that its paper business experienced a strong trading performance in the second half of 2018, which helped lift the group’s underlying earnings a share by 25% to 208c for the year to December 31, 2018.

The unit benefitted from the Felixton paper mill upgrade, as well as other capital projects and reported a 56.7% underlying operating profit of R694.4-million. The performance was supported by lower recovered-paper prices and increased corrugated packaging sales.

Underlying operating profit from the plastics business, by contrast, slumped by 29% to R49.5-million, owing to difficult trading conditions and a “disappointing” delay in improving the performance of the company polyethylene-terephthalate recycling plant.

The balance sheet of Mpact Polymers' balance sheet was restructured during the year with support from the State-owned Industrial Development Corporation, which increased its shareholding by 10% to 31%.

The group, which reported a 5% rise in revenue to R10.6-billion in 2018, would also accelerate product and business development efforts geared towards capitalising on opportunities arising from the global shift towards recycled products.

“Mpact’s integrated business model is uniquely focused on closing the loop in plastic and paper packaging through recycling and beneficiation,” Strong said.