Mpact shares initially jumped 5% on the release of its first-half results, but steadily slipped back to close slightly weaker on Monday, and it’s not hard to see why. Revenue was slightly higher at R5.9bn and operating profit from continuing operations fell almost 16% to R284m. The FM spoke to CEO Bruce Strong about the numbers.
There aren’t many overwhelmingly positive aspects to the past six months, other than your cash generation, which jumped from R178m to R443m. What is there to get excited about?
What people are seeing is that we are changing our portfolio, changing the business to align it to markets that are structurally strong, exiting markets that are structurally weak and investing in markets and products that we are able to develop a competitive advantage in. A good example is the closure of the Springs mill. It was a difficult decision, with all the trauma that went with it, but it was necessary because it has been a drag on our earnings for some time. In the past three years, we’ve sold Versapak, which made no money; we’ve exited low-value preforms; and we’ve invested in Mkhondo, which has had some start-up matters, but that’s in a growth sector. There are issues in the market — it’s tough, make no mistake — but I think shareholders will be pleased that we’re taking decisive action. We’re not waiting for the market to improve.
You talk about the importance of a new product — sodium lignosulphonate (SLS) — but say orders have not been “at the level anticipated”.
It’s the material you extract out of wood when you pulp it. It’s used as a binder in roads, in animal feeds and as an additive in concrete to make it stronger. The demand is there, but we have to prove our product in the market — we’re not unique — and that takes time.
Can you give an idea of the scale of its importance down the line?
The SLS plant was part of the whole R1.3bn Mkhondo upgrade and at full capacity it should generate about 35,000t, which can be sold into the local market or into foreign markets. The current selling price is about R6,000 — so R250m-plus of turnover, at a fairly high margin. It’s a byproduct from the mill, so the only additional cost is running the spray-drying plant to turn it into powder.
Your plastics division saw a big improvement in profit, to R45m from R7m — how?
It’s quite a diverse business, but what makes it interesting is that we’ve got a very strong position in the market with a very good cost position, and there are many options and opportunities to replace other products being used in that sector. For example, those Jumbo bins used in the fruit sector — the wooden bins are becoming harder to come by at the right price, so we’re seeing a huge substitution. You don’t need any market growth to realise the benefit. There’s also been a lot of substitution of plastics for glass on the FMCG side.
Is this the one thing that saves Mpact in the absence of any real economic growth in South Africa?
Correct. And the other thing which is useful is that we don’t only rely on the local market — for example, on the Jumbo bins, we rent those to fruit producers in South Africa, which use them to transport fruit to Europe, and in Europe we’ve got a team and the fruit producers take their fruit and we take our bins and then distribute and sell them. So it’s an export opportunity for which you don’t need any consumer spending growth in South Africa.
How worried are you about a strong El Niño? Mainly because fruit and citrus producers have been such good business for Mpact over the last while …
We have to brace for a situation where it isn’t favourable, but I read Wandile Sihlobo’s piece in the FM where he made the point that dam levels are high and the water tables are high, so for the upcoming season it’s not considered a huge risk. Coupled with that, the best indicator is what happened in the last El Niño, and what’s evident there is that different regions are affected differently. Some regions of the country get more rainfall, so that’s why our diversification both in fruit type and geography is important. And the final point is that our fruit producers are very capable, with very little government support, and they’ve weathered these situations in the past. But we will take the appropriate actions to make sure we’re not caught flat-footed.
How about the threat of imports? Is there any lobbying power that you have to prevent being swamped?
The fact that we are unprotected means our prices are under pressure because of import competition, and that hasn’t been insignificant in the last period because the Chinese have brought on so much capacity. Having said that, we’ve seen a really sharp increase in interest from ITAC [the International Trade Administration Commission of South Africa] and the DTIC [the department of trade, industry & competition] to intervene in this regard and we are engaging with them. So there’s definitely a greater appetite there.
Lastly, profits in the paper business fell by a quarter in the first half; is there any respite on the horizon?
We go to the market for fourth-quarter price increases and so we are moving into the market now to try to recover some of the increase in costs. And then the war in the Middle East has dampened enthusiasm for imports as a base strategy because overnight the cost of freight and insurance increased substantially, and then people weren’t sure they’d get their product. There was suddenly greater enthusiasm to secure the base volume locally and import on the margin, where six months ago that wasn’t the case.
