South Africa’s largest recycling business hit by ‘debilitating power outages’

Mpact, the largest paper and plastics packaging business and recycler in South Africa, reported its results for the year ended December 2019, highlighting difficult trading conditions.

Bruce Strong, chief executive officer of Mpact, said: “trading over the past year across most of our businesses has been very challenging from a demand perspective. The South African economy remained weak and business and consumer confidence have been hit hard by load shedding and uncertainty in a number of areas.

“This had a marked effect on our customers and particularly our consumer-facing businesses. Sales volumes were under pressure across most sectors.”

Financial highlights:

• Revenue increased by 5.1% to R11.1 billion (December 2018: R10.5 billion);
• Underlying EBITDA up 7% to R1,374 million (December 2018: R1,284 million);
• Underlying operating profit down 3.7% to R724 million (December 2018: R752 million);
• Underlying earnings per share of 192 cents (December 2018: 248 cents);
• Return on Capital Employed (ROCE) of 11.8% (December 2018: 11.9%);
• Total gross cash dividend 60 cents per share (December 2018: 70 cents per share).

Mpact, which employs in excess of 5,000 people, said that recent capital investments such as its Felixton paper mill upgrade and the new corrugator in Port Elizabeth contributed positively to the results.

During the year, Strong said that the group’s paper punnets and paper bags for grapes, tomato’s and other fruit gained prominence and market acceptance, and can now be seen on retail shelves locally and abroad. “Our investment into shopper bags has been positive, with two additional paper bag formers installed in 2019,” he said.

The shopper bags are made from 100% recycled paper produced at Mpact’s Felixton mill, providing a strong, sustainable substitute for plastic shopper bags, the chief executive said.

“One of the most difficult decisions we took this year was to shut the PET recycling plant, Mpact Polymers because we were unable to get a sustainable price for our recycled PET,” he said.

Consequently, Mpact Polymers has been deconsolidated from the group, and its profit and loss statement for the reporting period is disclosed separately as a discontinued operation.

Group revenue from continuing operations of R11.1 billion was 5.1% higher than the prior year’s R10.5 billion, with higher average selling prices offsetting lower sales volumes, Mpact said.

Effective 1 January 2019, Mpact adopted the new accounting lease standard – IFRS 16 which decreased profit before tax by R33 million and underlying earnings per share by 14.0 cents.

Underlying operating profit from continuing operations decreased by 3.7% to R724 million.

Mpact said its paper business reported a 5.4% increase in segment revenue for the year to R8.7 billion due to higher average selling prices. External sales volumes decreased due to lower export and local demand, particularly for containerboard and cartonboard, it noted.

Revenue in the plastics converting business was up 3.2% to R2.4 billion (December 2018: R2.3 billion) due to higher sales volumes of preforms and closures, it said.

Underlying basic earnings per share and headline earnings per share for the year were 191.8 cents (2018: 247.7 cents) and 185.8 cents (2018: 235.3 cents), respectively. The total dividend per share for the year was 60 cents, a decrease of 14.3% to the prior year’s dividend of 70 cents.

Mpact said that deteriorating market conditions resulted in an impairment of R1.3 billion comprising R549 million of goodwill and R742 million of plant and equipment, raised against the Springs and Piet Retief paper mills as well as the trays and films business.

This non-cash charge equates to approximately 633.2 cents per share and was excluded from headline and underlying earnings per share. “Notwithstanding the impairments, these businesses remain operational,” it said.

“Looking to the year ahead, there is still no indication of any meaningful improvement in the South African economy, which is aggravated by the debilitating power outages,” said Strong.

“The global oversupply of containerboard and cartonboard persists while we expect the dynamics supporting recycled fibre availability to continue for the remainder of the year.

“We will prioritise cash preservation and mitigating the effects of the weak economy through cost savings, efficiency gains and product innovation,” he said.

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