Packaging and recycling group Mpact CEO Bruce Strong is unfazed by the company’s high levels of debt, saying it is confident of returns from recent investments made into its plastic business, while also making good progress on cost-improvement initiatives.
The company reported on Thursday its net debt had increased R300m to R2.6bn, while the group has a market capitalisation on the JSE of just R4.1bn.
Strong said: “Our current gearing is sitting at around 34% [of NAV] and that includes after investing R843m in capital projects in the past six months. We were able to fund that with generation from operations of R950m, while we had a reduction in working capital of about R102m.
“Besides all of that, we’ve paid dividends of R110m so I think its important to get perspective,” he said.
“We are doing what anybody could expect under the circumstances to manage the debt, manage the cash and also to make sure we take advantage of the many growth opportunities that exist within the market,” Strong said.
He said while the debt levels “might appear in absolute terms to be higher than what they were”, in gearing terms they were still very manageable and the group would not let it get out of control.
Mpact made a capital commitment of R2.9bn in the prior financial year of which R2.5bn was announced at President Cyril Ramaphosa’s investment drive, with R1.2bn earmarked for its Mkhondo mill project. This week, it said upgrades at the Felixton Mill and the Mbombela paper converting plant were also on track.
Strong’s sentiment was backed by CFO Brett Clark, who said net debt to earnings before interest, tax, depreciation and amortisation (ebitda) actually improved in the period.
“A lot of the banks use net debt to ebitda as one of the key ratios. Ours was 1.5x in June last year and is 1.4x this year ... from a ratio point of view we are actually better off than we were a year ago,” said Clark.
On Thursday, Mpact hiked its interim dividend after reporting a jump in profit thanks to higher selling prices despite lower sales.
The company said it will pay shareholders 45c a share for the six months to end-June — an increase of 12.5% — after profit from continuing operations jumped 36.8% year on year to R331.4m.
Headline earnings per share, which excludes exceptional and one-off items, rose almost a third to 188c, while group revenue improved by 8.7% to R6.2bn even as volumes decreased by 10.2%.
On further growth, the company said it is also preparing for a major portfolio shift in its plastics business saying it will be more focused on returnable and reusable packaging.
Strong said this, coupled with the imminent sale of the plastic trays, films and sheeting business, Versapak, is expected to set Mpact on a steady growth path.
“There is going to be a big portfolio shift and that mix variance will be positive for our business,” said Strong, pointing out that producing returnable items was a lot more environmentally friendly.
Operating profit in the plastics business increased to R63.2m from R3.5m in the prior comparative period owing partly to investments in the company’s bins and crates business.
Mpact’s paper business, the largest by operating profit, saw sales volumes fall as consumer demand remained subdued as a result of elevated inflation and interest rates, a weaker rand and ongoing power cuts.
Some customers also had stockpiles of products such as containerboard and carton board due to delays in the arrival of orders placed last year when there were global shortages. That led to production downtime at some of Mpact’s mills.
To offset the effect of load-shedding, Mpact installed solar power to reduce its reliance on Eskom.
The company said thanks to its installed solar generation capacity and process designs, “we have been able to respond to the curtailment requirements up to stage 6 load-shedding without materially reducing production”.
Looking ahead, Mpact said supply chain constraints suffered last year had improved while cost inflation continued to come down. Still, input costs are expected to remain high in SA as consumer demand remains muted.
“We have strategically targeted sectors that are projected to grow in the foreseeable future, and these sectors are also somewhat insulated from SA consumer spending patterns,” the company said. “Some of our key areas of focus include fruit exports, convenience shopping, recycling, and waste management.”
Mpact’s share price closed 2.71% higher at R27.29 on Thursday.
Update: August 3 2023
This article has been updated with new information.
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