Tricky con­di­tions hit the group hard

Financial Mail - Investors Monthly - - Analysis - Stafford Thomas

Even well-man­aged com­pa­nies with the best plans can hit a tough spot. It’s a fate that has struck Mpact.

The pack­ag­ing group came un­stuck in its year to De­cem­ber. Sharp raw ma­te­rial in­put price in­creases, in­creased mar­ket com­pe­ti­tion and start-up prob­lems at a new recycling fa­cil­ity were among fac­tors that sent head­line EPS (HEPS) div­ing 33% and pre­cip­i­tated a 13.6% div­i­dend cut.

Fol­low­ing two years dur­ing which HEPS jumped 71% in to­tal it was a big set­back for Mpact. Since its un­bundling by Mondi in July 2012, its share price trebled in less than four years. Hav­ing peaked in April 2016, the share price has since all but halved.

The big­gest profit dam­age in 2016 was caused by Mpact’s core pa­per di­vi­sion, which ac­counts for about 75% of group rev­enue and 85% of op­er­at­ing profit.

Faced by grow­ing com­pe­ti­tion from three sig­nif­i­cant un­listed ri­vals, Cor­ruseal, Golden Era and Neopak, Mpact’s pa­per di­vi­sion’s rev­enue growth came in 5.2% up at R7.4bn. Growth would have been even lower if not for the ac­qui­si­tion of pack­ag­ing ma­te­rial recycling spe­cial­ist Re­made in May 2016. Ex­clud­ing Re­made’s con­tri­bu­tion, rev­enue growth was 1.2%.

Mpact’s pa­per di­vi­sion also found it­self squar­ing up to its ri­vals in a scram­ble for re­cy­clable pa­per, its key raw ma­te­rial. The re­sult was an 11% in­crease in the di­vi­sion’s raw ma­te­rial in­put costs which, com­bined with lower sales vol­ume, sent its op­er­at­ing mar­gin tum­bling to 9% from 11.3% in 2015 and its op­er­at­ing profit slid­ing 17.5% to R664m.

That the go­ing will be even harder for the pa­per di­vi­sion in 2017 ap­pears al­most in­evitable. Here a big fac­tor will be the com­ple­tion of the fi­nal phase of the ex­pan­sion of Mpact’s Felix­ton pa­per mill.

Set for com­mis­sion­ing in July, the project will add 60,000 t of an­nual ca­pac­ity.

“It will mean even higher [re­cy­cled raw ma­te­rial] prices,” says Mpact CEO Bruce Strong.

Adding fur­ther profit pres­sure in 2017, com­mis­sion­ing of the new ca­pac­ity will re­quire clo­sure of the KwaZulu Natal mill for 50 days — 33 days in the first half of the year and 17 days in the sec­ond.

Mpact cau­tions in its re­sults state­ment that the clo­sure will re­sult in a non­re­cur­ring re­duc­tion in earn­ings for the fi­nan­cial year. On the bright side it adds: “This up­grade will sig­nif­i­cantly im­prove the mill’s cost com­pet­i­tive­ness, prod­uct qual­ity and of­fer­ing.”

Mpact’s plas­tics di­vi­sion also suf­fered a set­back in 2016, its op­er­at­ing profit fall­ing 15.3% to R168m. This was de­spite a price-in­crease-driven 8.6% rise in rev­enue to R2.8bn.

Erod­ing profit was Mpact Poly­mers, SA’s first PET (poly­eth­yl­ene tereph­tha­late) plas­tic bot­tle recycling ven­ture, which has as its an­chor client SA Brew­eries’ ABI di­vi­sion, SA’s largest Coca-Cola bot­tler.

The ven­ture’s recycling plant, built for R350m, was com­mis­sioned in July 2015 and has an an­nual poly­mer out­put ca­pac­ity of 21,000 t. But the recycling plant has ex­pe­ri­enced prob­lems dur­ing its pro­duc­tion ramp-up. It left the ven­ture nurs­ing an op­er­at­ing loss of R87m in 2016.

Ex­clud­ing Mpact Poly­mers’ loss, Mpact’s plas­tics di­vi­sion put in a cred­i­ble per­for­mance in 2016, lift­ing op­er­at­ing profit 2% to R255m. This came thanks to a jump in the op­er­at­ing mar­gin from 7.9% to 9.4%.

The PET recycling plant seems to be headed to prof­itabil­ity with its loss of R17m in the six months to De­cem­ber, against a R70m loss in the first half. The sup­ply of re­cy­clable ma­te­rial looks promis­ing.

Mpact’s PET recycling plant could just be the start of far big­ger things in com­ing years.

Though Mpact is un­likely to shoot the lights out as a top mar­ket per­former this year, its share price has al­ready moved up 15% from its late-2016 low and is show­ing solid signs of more of the same to come.

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