Mpact expects difficult trading conditions to continue

7th August 2019

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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Paper and packaging group Mpact’s investments over the last four to five years, specifically in its paper business, enabled it to produce good results for the six months ended June 30, despite a difficult trading environment, CEO Bruce Strong told Engineering News Online on Wednesday.

The paper and packaging producer has, over the past four years, invested over R1.6-billion in capital projects and other investments designed to reduce, reuse or recycle packaging.

These investments, Strong explained, are the ones that contributed to Mpact’s performance for the period under review.

Mpact’s basic earnings a share (EPS) and headline earnings a share for the half-year period were 40.2c and 39c, respectively, with underlying EPS having increased by 25.2% to 39.4c.

The paper and packaging producer also achieved a 29.4% improvement in underlying operating profit to R217.7-million for the period, which it said reflected further benefits from the recent capital investments.

Group revenue increased by 4.2% to R5.2-billion, with external sales volumes having increased by about 1%.

Mpact’s paper business reported revenue growth of 4.1% to R4.1-billion, with sales volumes in line with the prior period. Sales volumes in recycling increased off a low base, while volumes in the rest of the paper business declined by 8.1%, mainly as a result of lower containerboard exports, which were affected by a global oversupply.

Net debt increased to R3-billion, up from R2.2-billion in the prior comparable period, mainly owing to Mpact having adopted International Financial Reporting Standard 16, as well as increases in working capital.

In terms of headwinds during the period, Strong highlighted that load-shedding by embattled power utility Eskom, had been a challenge that contributed to a lack of confidence, both in business and among consumers.

While load-shedding had not been the main cause of the company’s production losses, he explained that load-shedding had led to lower demand.

Strong told Engineering News Online that Mpact was installing its third solar power plant at its operations to mitigate future load-shedding.

The plan was to install solar power at every plant where Mpact owns the building, he added.

Additionally, Mpact is also working on a number of waste-to-energy projects, but these have been hampered by the time it has taken to get the approvals for emission licences.

“It’s been difficult to progress [the waste-to-energy projects], but we are working on a number of options in this respect, and will continue to do so,” Strong averred.

Meanwhile, decreasing government spending, owing to budget constraints, as well as the run-up to South Africa’s National Elections, in May, saw Mpact customers remain concerned about not only the electoral outcome, but what it may mean for land policy in the country.

Meanwhile, shifting fruit harvest periods, as a consequence of climatic conditions, led to Mpact not realizing volumes in the proportions it had initially expected, based on past experiences.

Working capital at the end of the period was high because of excess stock carried through from the first quarter of the year, as sales in both the domestic and export markets did not meet forecast.

Mpact had not expected the economy to contract in the first quarter, nor the extent thereof.

“To be honest, there hasn’t been much change for practical purposes in terms of the outlook, but I’d say we’ve now had to adjust our business, because we were caught by surprise by the extent of the decline in the first quarter, which is why we were caught with high stocks – which we still weren’t able to work through by the end of the period,” Strong explained to Engineering News Online.

As a result, Mpact has adjusted its production and business to take the lower demand into account, as the local business environment is expected to remain sluggish.

Exports, meanwhile, reduced substantially in the first half of the year, but Mpact had managed to claw back some of those export volumes, even though these won’t be as profitable as they were in the past, Strong pointed out.

During the second quarter, specifically, all three of Mpact’s paper mills took commercial downtime and external containerboard purchases were reduced to manage inventory.

From January 1, Mpact increased its shareholding in West Coast Paper Traders to 60%, up from 49% in June 2018, which resulted in a 0.6% increase in revenue for the company.

Notwithstanding decreased sales volumes, underlying operating profit in the paper business of R295.9-million increased by 35%, mainly as a result of improved containerboard margins, offset by lower domestic sales.

Revenue of R1.1-billion was reported by the plastics business, representing an increase of 3.3%, with plastic conversion volumes down 2.7% on the back of subdued demand.

Underlying operating profit in the plastics conversion business was at breakeven, compared with R25.4-million in June 2018, as a result of continued price pressures across all businesses, with the biggest impact being in trays and films.

Mpact polymers reported an operating loss of R37.5-million, down from R38.4-million in the prior comparable period. Total sales volumes increased by 22% to 3 783 t when compared to the prior period, however, benchmark recycled polyethylene terephthalate (PET) selling prices declined 6.5%.

New label washing and wet grinding equipment, valued at R35-million, was installed, with the latter currently being optimised. The final part of the equipment was commissioned towards the end of June, of which Mpact will only see the performance impact from August onwards.

However, while these additions will increase throughput, reduce dirt and other contaminants carried forward to the wash plant, and improve product quality, Strong noted that the company still needed to work with its customers to get a sustainable price for the recycled PET.

Mpact has also concluded the refinancing of R2.6-billion of its bank facilities, subject to the fulfilment of certain conditions precedent.

While the R2.6-billion is the full amount of Mpact’s debt that it had on term facilities, CFO Brett Clark noted that the company had another R210-million bank facility with Standard Bank that was not guaranteed for any period of time.

In effect, this means the facility could be withdrawn at any stage.

“All our long-term funding has been refinanced [even though] it wasn’t all due for refinancing. But, because the rates have dropped, we were able to refinance all our debt in one go, rather than do it again in a year’s time or so,” he commented.

Clark said that, by refinancing its existing bank facilities, Mpact had lowered its cost of funding, while extending the terms of the facilities to between three and five years.

“The facilities have been structured as revolving credit and general banking facilities to allow increased flexibility,” he said.

Despite there currently being no signs of any meaningful improvement in the South African economy, Strong expects better sales from the agricultural sector during the second half of the year as a consequence of good growth in citrus fruit volumes, which had a late start to the season.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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