Mpact is a solid JSE mid-cap that just gets on with it. The management team has been there for a long time and they’ve had to deal with all the usual challenges of operating in our beautiful country. Over the past year, the share price is up over 50%.
The packaging company talks about the “circular economy” and the integrated business model that addresses it. Mpact is the largest paper and plastics packaging and recycling business in South Africa, which should help you understand what their reference to a circular economy means. The group employs over 5,100 people and has 47 operating sites. South African sales contribute around 88% of revenue.
The group has released results for the year ended December 2021 and they tick all the boxes.
Revenue increased by 12.6% to R11.5 billion, which drove a much larger percentage increase in underlying operating profit of 56.2% to R948 million. Again, this is the benefit of operating leverage during a recovery period.
The operating margin increase was also driven by the gross profit margin expanding to 36.9%.
The cash generative nature of the business led to a reduction in average net debt. This resulted in net finance costs decreasing by 17.7% to R139.5 million.
The company takes advantage of the stubbornly low multiples on the JSE, with R257 million in share buybacks in 2021 (10% of shares in issue at the start of the year). In addition to this substantial return of capital to shareholders, Mpact also declared a 50 cents per share final dividend for 2021 (compared to nil in the prior period as the group dealt with Covid).
Return on capital employed increased substantially from 11.4% to 17.8%, a level well in excess of Mpact’s cost of capital.
HEPS increased by 89% in 2021 to 343.2 cents. With the current market sell-off, the Price/Earnings multiple has dropped to 8.7x based on yesterday’s closing price.
On a segmental basis, the Paper business enjoyed improved demand and favourable product mix, with higher average selling prices partially offset by input cost pressures. Paper revenue increased by 12.2% and EBIT increased by 51.5%.
The Plastics business grew across most sectors and improved its profitability, despite delays in increasing the selling prices to recover high polymer costs (the input cost for plastics). Revenue was up 14.2% and underlying EBIT increased by 33.7%.
Mpact is selling its plastic trays and films business, Mpact Versapak. The products don’t fit with the rest of the business and engagements with potential buyers are at an early stage. Versapak had a tough time in 2021, with net earnings of just R2 million vs. R15 million in 2020.
In my view, Mpact is a strong South African industrial business with exposure to attractive trends, like export of fruit and localisation of supply chains. With the latest market sell-off, I’m seriously considering adding this to my portfolio.
The risks to the business lie in electricity tariff increases, escalating fuel costs and all the usual South African stuff. These issues should never be ignored.
