Solid results despite challenging trading conditions

KEY FINANCIAL DATA

Net asset value per share up 9% to R34.11 from June 2023
Satisfactory progress on strategic projects and portfolio optimisation
EBITDA of R763 million
Underlying operating profit of R455 million
Headline earnings per share of 145 cents
Interim dividend per share of 30 cents

Johannesburg, 5 August 2024 – Mpact, the largest paper and plastics packaging business and recycler in Africa, reported its interim results for the six months ended 30 June 2024. As anticipated, the challenging economic and trading environment persisted during the six months ended 30 June 2024. The uncertain socio-political environment leading up to the national elections, high levels of loadshedding that continued until the end of March, high inflation and interest rates all contributed to weak consumer and business sentiment.

Bruce Strong, Mpact Chief Executive Officer, said: “Against this backdrop, we are pleased to report a 9% increase in our net asset value per share over the past year to R34.11. For the six months ended 30 June 2024, the Group generated EBITDA of R763 million and cash from operations of R516 million. Although lower than last year, this demonstrates our resilience through the cycle.

We have also continued to drive our value enhancing strategy, of aligning our business to growth sectors with sustainable returns and enhancing our operational resilience. Our solar PV generated power amounting to 16MWp saved us over R18 million in electricity costs during the first half of the year.

The Mkhondo mill upgrade project of R1.3 billion is progressing well, with construction underway and most of the critical equipment ordered. The project is expected to be completed as planned during the first half of next year.”

Mpact Operations (Pty) Ltd (“Mpact Operations”), the Group’s main trading entity in South Africa, retained its Level 1 B-BBEE status.

Financial review

Group revenue from continuing operations for the period ended 30 June 2024 decreased by 1.1% to R6.173 billion (June 2023: R6.240 billion), primarily due to a 2.1% decrease in sales volumes.

Underlying operating profit decreased to R423 million (June 2023: R531 million), as a result of 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.

Return on capital employed for total operations was 14.4% (June 2023: 18.8%) due to relatively large capital outlays for the strategic growth projects which are still in progress.

Hannes Snyman, Chief Financial Officer, stated: “Net debt increased to R3.2 billion as we invested R490 million in capital projects and R73 million in acquiring an interest in Africa Tanks. We also paid R111 million in dividends to shareholders. We have sufficient headroom from our existing bank facilities and remain comfortably within our bank debt covenants.”

Paper business

Revenue of R5.097 billion was 3.3% lower than the prior period (June 2023: R5.269 billion) due to lower sales volumes, as well as lower containerboard and cartonboard selling prices.

Paper Manufacturing total sales volumes were in line with the prior period with an increase in exports offsetting a decline in domestic sales. The continued slowdown in both containerboard and cartonboard sales necessitated production downtime at all three paper mills to manage inventory levels and conserve cash. This resulted in downtime amounting to approximately 13% of their capacity during the period, which includes eight days at the Springs mill due to utility outages.

In Paper Converting, sales volumes declined by 1.4% with an increase in the agricultural sector offset by a decline in the industrial sector.

Underlying operating profit decreased to R397 million (June 2023: R548 million) due to the under-recovery of fixed costs, non-recurring costs of R25 million as well as higher depreciation from major projects which were capitalised towards the end of 2023.

Plastics business

Revenue in the Plastics business of R1.097 billion increased by 10.6% (June 2023: R993 million). Sales volumes increased by 2.7% with growth in the Bins & Crates and FMCG businesses on the back of recent investments and new products offset by a decline in Preforms & Closures.

Despite the increase in revenue, operating profit was in line with the prior period at R64 million with an increase in Bins & Crates offset by declines in the other two businesses. The decreases are mainly attributable to non-recurring items amounting to R19 million. Depreciation increased by R14 million, or 18%, due to major projects capitalised towards the end of 2023.

Effective 1 April 2024, Mpact Plastic Containers Castleview (Pty) Ltd acquired a 30% interest in Africa Tanks (Pty) Ltd (“Africa Tanks”) for a consideration of R73 million. Africa Tanks manufactures plastic water tanks for the residential, commercial and agricultural markets and is the first blow-moulding water tank manufacturer in Southern Africa.

Discontinued operations

Following a strategic review in 2021, Mpact’s Board decided to sell its Plastic Trays & Films business, Versapak, as a going concern. Versapak currently forms part of the Plastics Division of Mpact Operations.

On 31 July 2024, Mpact entered into a sale of business agreement with Greenpath Recycling (Pty) Ltd (a wholly owned subsidiary of Sinica Manufacturing (Pty) Ltd) (“Sinica”), whereby Mpact will dispose of Versapak as a going concern for a purchase price of R268 million. The purchase price will be adjusted based on the actual amount of stock on hand and the value of certain employee liabilities as at the effective date of the disposal.

The disposal excludes all cash, debtors and creditors of the business. Also excluded from the disposal are the two properties from which the business operates. The parties have therefore also entered into two separate lease agreements in terms of which Sinica will lease these properties on market-related terms.

For the period ended 30 June 2024, Versapak reported revenue of R485 million (June 2023: R545 million), and net earnings of R33 million (June 2023: R34 million). Versapak’s net assets held-for-sale at period end were R247 million (June 2023: R173 million; December 2023: R239 million).

Outlook

Business and consumer sentiment has started to improve on the back of the positive outcome of the national elections, lower inflation, no loadshedding since April 2024, and a possible interest rate cut later this year. This bodes well for all our operations as any recovery in the economy should translate into improved demand which we are well positioned to meet.

The recent changes and improvements at Transnet and Eskom, together with their commitment to proactively respond to challenges, should further support growth in South Africa. This in turn will benefit the prospects for all manufacturers. These improvements will also directly benefit our fruit exporting customers who have already invested extensively for growth.

Strong cautioned: “Notwithstanding the above, we still expect our full year earnings to be under pressure relative to last year. Should demand pick up notably, the second half of this financial year could be better than the corresponding period of last year. However, this may not be enough to fully offset the first half decline in earnings.”

We are expecting an increase in containerboard and cartonboard sales volumes, however, lower average selling prices may partially reduce the benefits of the positive operating leverage for the Group.

The performance of the Plastics business is anticipated to improve on the back of recent investments in Bins & Crates, which may be partially offset by lower sales in the Preforms & Closures business.

The disposal of Versapak is expected to be completed by the end of the financial year, subject to regulatory approvals. The net proceeds will be used to reduce debt.

We will continue to focus on our value-enhancing strategy, which prioritises growth sectors and investments in innovative, higher margin and sustainable products.