Tricky conditions hit the group hard

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.