Mpact bullish after exports surge 36%

Mpact has reported a 36% surge in exports in the first half of this year, with the group bullish about packaging prospects as Eskom and Transnet begin to get their houses in order.

SA’s biggest paper and plastics packaging business and recycler was upbeat about a rebound in packaging despite reporting lower profits at the halfway stage, reflecting subdued demand and lower selling prices.

Underlying operating profit decreased to R423m from R531m for the six months to end-June due to lower selling prices in the paper business, the under-recovery of fixed costs and higher depreciation from major projects capitalised towards the end of 2023.

Headline earnings per share (HEPS) for continuing operations declined to 122.2c from 188.2c a year ago. HEPS from total operations fell to 144.6c from 211.6c. An interim dividend of 30c per share was declared.

Mpact CEO Bruce Strong said a lull in paper demand in recent years saw Mpact forced to carry out multiple temporary shutdowns of its paper machines to avoid building up stock and tying up cash.

However, Strong said with an easing of inflationary pressure on the horizon Mpact was looking to increase containerboard and cartonboard exports to offset slumped selling prices and subdued local demand. It would undertake fewer shutdowns, encouraged by the positive interventions and trends at Transnet and Eskom.

The CEO said this was as business and consumer sentiment had started to improve due to the positive outcome of the national elections, lower inflation, no load-shedding since April and a possible interest rate cut later in the year.

“We are exporting more now. Our exports in the first half increased 36%, which assisted in keeping the machines running longer than they would have otherwise,” he told Business Day.

“In the second half we’ll look to do more of that as the global markets pick up... And we also look to improve our position in the local market as the economy picks up, which we’re hoping it will do in the medium term.

“There’s been a real positive change both in Transnet and Eskom,” Strong said. “These improvements will also directly benefit our fruit-exporting customers, who have already invested extensively for growth.”

For the first six months, revenue from continuing operations decreased by 1.1% to R6.17bn.

Revenue in the paper business was 3.3% lower due to a fall in sales volumes, as well as lower containerboard and cartonboard selling prices. However, revenue in the plastics business was up 10.6% and sales volumes increased by 2.7%.

Mpact generated earnings before interest, taxes, depreciation and amortisation of R763m and cash from operations of R516m. Though lower than last year, Strong said this demonstrated Mpact’s “resilience through the cycle”.

While the containerboard market was still sluggish, the CEO said it was better than it was at this time last year, with the group poised to shore up containerboard and cartonboard sales through exports.

“I’d say we’re probably at the bottom of the cycle when it comes to the packaging sector at the moment, and we’ve got a lot of positive things to look forward to in the developments after the elections,” Strong said. “So we’d hope to see better utilisation of our paper mills.”

Moreover, the numerous projects it has in the pipeline are set to fortify it for growth from 2025.

Mpact, which has a market capitalisation of R4.4bn, was among the companies that benefited from pandemic-related lockdowns, which spurred the rise of online convenience shopping. It made significant investments to ensure it could cash in on high demand.

The R1.3bn Mkhondo mill upgrade project — realigning its paper mill to make products used in the fruit sector — is expected to be completed during the first half of next year.

Mpact also established a new manufacturing facility in its bins & crates segment over the past two-and-a-half years, which is due to be finally commissioned by the end of this year.

While anticipating that full-year earnings would not be as high as the previous year, Strong expressed optimism that Mpact’s planned projects would yield highly positive results, even though the second half may present challenges. 

The disposal of its VersaPak business is expected in the second half. Newly appointed CFO Hannes Snyman said the nearly R270m proceeds of the sale were expected to be channelled towards servicing Mpact’s R3.2bn debt pile.

Mpact shares were down 2.32% to R29.01 on Monday.

Update: August 5 2024
This story has been updated with more information and comment.

mackenziej@arena.africa
gumedemi@businesslive.co.za