Mpact writes down R1.3bn of struggling assets
The paper and packaging firm has come up against weak local and international demand
Mpact, the largest paper and plastics packaging business and recycler in Southern Africa, has written down the value of its various assets by a total of R1.3bn as the group battles low demand for its products.
The move comes as Mpact, which has manufacturing operations in SA, Namibia and Mozambique, battles low economic growth in SA that saw the company recently close its recycling plant in Gauteng.
“It is a view on the future demand and pricing prospects in those businesses. We took that view after evaluating the businesses. They can still generate cash and we do not intend to dispose of any of them. But the carrying value on the balance sheet was more than the amount of cash that they can generate. We had to impair the difference,” Mpact CEO Bruce Strong said on Wednesday.
Speaking after the release of Mpact’s results for the year ended December 31, Strong said the businesses remained operational despite the impairments.
Mpact’s full-year revenue increased 5.1% to R11.1bn, compared with R10.5bn. Operating profit, however, fell 3.7% to R724m. Earnings per share were also down from the previous 248c to 192c per share. Total cash dividend was 60c, down from the previous 70c per share.
Mpact said the results were reflective of the reduced local and export demand “coupled with lower margins”. But contributions from recent projects such as the Felixton paper mill upgrade in KwaZulu-Natal and the new corrugator in Port Elizabeth partially offset the effects of the tough trading conditions.
The difficult environment prompted Mpact to close the polyethylene terephthalate (PET) recycling operation, Mpact Polymers in Wadeville, Gauteng, during the 2019 financial year. The closure was the result of the recycled PET selling price falling below Mpact Polymers’s cash cost of production, and the situation was expected to remain like this for the foreseeable future.
Working capital at the end of the period remained high due to sales not meeting expectations. The paper mills took commercial downtime equal to about 10% of their annual capacity. “That is something completely abnormal. The last time we had downtime anywhere near this level was in 2009 during the great recession,” he said.
The downtime reflected unfavourable demand patterns in SA and internationally. “Globally there is an oversupply of containerboard and cartonboard. In SA the market is weak and the prices have come off. So we decided to take a downtime and we will continue to do that. The right thing to do was to shut,” he said.
Commenting on SA slipping into recession, Strong said: “That was not a surprise for us, to be honest. We are seeing across the board that our customers are under pressure. Our operations are also under pressure because of the unreliable electricity supply. We have had a situation in Springs (Gauteng) for the last two weeks where we had not had power for our bigger factories because of a failure of a municipal substation,” Strong said.
Strong said there was no indication of “meaningful” improvement in the SA economy, which has been aggravated by the debilitating power outages. “We will prioritise cash preservation and mitigating the effects of the weak economy through cost savings, efficiency gains and product innovation,” he said.