Like a thunderbolt from the blue, hope appeared for locallyfocused businesses, as paper and packaging company Mpact proved a few days ago after releasing its interim results. Despite volumes remaining stagnant (just a 1% increase over the previous period), the company managed to ramp up revenue by 13% on the back of a favourable price and product mix (+9.4%) and the benefit of acquisitions (+2.8%).
Throw in a little bit of operating leverage (when total costs rise more slowly than turnover) and you have the recipe for a decent set of numbers: operating profit rose 14.5% to R270m while underlying earnings per share rose 19.2% to 91.8c/share. The market was clearly surprised (and impressed) by the numbers as the share price added a further 11% in the three days following the release of results, to trade at R34.40 at the time of writing. The company now trades at a price-earnings multiple of 13.46 times and a dividend yield of 2.14%.
Besides the impressive performance in difficult trading conditions, there is another catalyst that bodes well for the further uplift of the company’s share price – the company is planning to add a third leg to its operating structure (called Mpact Polymers) as it builds a PET recycling plant which will become operational in the second half of 2015. The company is building the project with the IDC as partner, with the split being 79%:21% in favour of Mpact. The assets will be completely ring-fenced from other
Sep 2013 companies in the group, and as such will be a stand-alone project.
The plant, which will have a capacity of 21 000 tons of recycled PET per annum, will cost an initial R350m to build and it is anticipated that it will meet Mpact’s minimum investment criteria over the period. When discussing the project at the results announcement, CEO Bruce Strong was at pains to explain the company had been very careful in building the business case for the investment. “We studied the models overseas and identified the success of the plant would be determined by four factors: baled bottle supply, secure throughput [production], a sufficiently high selling price, and an adequate yield [ratio of input to output].”
To hazard an educated guess at what the potential value of the project might be, I’d say the project would have to comfortable generate returns above the company’s cost of capital. In fact, with the risks attached to a new project, I would put the IRR in the region of 20%-25%. This would make the net present value of the project at least R160m, which would translate to another R1 to the share price, providing that everything comes to pass as the company plans.