Finweek English Edition - - INVESTMENT -

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


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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.

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