Mpact
Recycling is an industry of the future.
Various industries are finding innovative ways of producing new products from waste materials. Adidas announced that it expects to make 11-million pairs of shoes in 2019 using recycled ocean plastic. This is more than double the number of pairs it made this way in 2018. So far, they have intercepted 2,810 tons of plastic from reaching our oceans.
According to PET Plastic Recycling Company (Petco), recycling polyethylene terephthalate (PET) bottles created an estimated 68,000 income opportunities in 2018 and to date, recycling PET bottles has saved more than 4.3-million cubic metres of landfill.
Glass recycling also plays a pivotal role in the economy. The Glass Recycling Company states that 42% of glass is recycled and about 80% of glass is diverted from landfill through recycling.
Mpact, an offshoot of Mondi, the largest collector of recyclable packaging and producer of packaging products, has faced significant price pressure more than the past few years, having fallen from its highs of R52 in 2016 to its current price of about R16.
The drought in the Western Cape, depressed economic growth in SA and the capex project at the Felixton Mill have been factors. Mpact, had up until 2016 performed well, from both an earnings and cash flow perspective. Though the company has fallen on hard times, I have confidence that the share price represents value and that management will be able to get the group back to a more normalised level of earnings.
The results to June illustrated the start of the earnings recovery. Underlying earnings per share grew 25%, driven by a strong recovery in the paper business, with paper earnings before interest and taxes margins increasing to 7.3%, from 5.6% in the prior year. The sustainability of this increase is crucial to the investment case.
Management says the paper margin can increase to above 10%, driven by efficiency improvements at the Felixton Mill and increasing vertical integration with recycling and use of recyclable material. Waste paper is a key market, and Mpact will need waste paper prices to remain low to help improve paper margins.
Additional catalysts for earnings include a recovery in the plastics business as the Western Cape drought recovery continues, improvement in the plastics polymers business to break even (now unprofitable), as well as the utilisation of tax incentives associated with the polymers business.
From a cash-flow perspective, management has guided towards an improvement in the full year working capital position (particularly in inventories), which would go a long way to degearing the group from the net debt to earnings before interest, tax, depreciation and amortisation of 2.2 times. This could also add an interest cost saving tailwind to earnings. Any economic recovery in SA could add significantly to group earnings down the line.
Gold
Gold has traditionally offered diversification in a portfolio. In times of economic stress that we are experiencing, it has decoupled from the stock market. Over the past five, three and one-year periods gold has outperformed the JSE all-share index in dollar terms on a total return basis.
The gold price is volatile, but unhedged gold shares are even higher risk and more volatile. This additional volatility is due to the inherent leverage in the mining sector and company idiosyncrasies.
We are in an environment of uncertainty: populism, trade war talk, Brexit, and so on Bearing this in mind, there is space in one’s portfolio for investment in a gold ETF, which offers less volatility and mirrors the gold price and risk hedging properties more appropriately.
Molelekoa is a portfolio manager at Umthombo Wealth. Her views do not necessarily reflect those of Umthombo.
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