Key message: Volumes recover well with paper margins boosted from switching low-margin paper exports to the local market. Some cost pressures should be recovered through price increases in 2H.
- Mpact released 1H FY21 results. Revenue increased 16.3% on a 13.2% increase in sales volumes. EBIT increased by 165% as margins recovered from 2.5% to 5.7% – largely due to reduced low margin exports and rolled pulp sales in the paper division.
- Diluted HEPS recovered strongly from 8c in the comparative period to 119c. Share buybacks totalling R345m (14.5% of SISS) were done (R88m in 2H FY20 and R257m in 1H FY21). As a result, a dividend was not declared and there is a likelihood that a dividend will be passed again for the full year (the share buyback exceeds the normal dividend cover).
- Paper: Revenue up 15.8% with volumes increasing 12.7% and 9.2% in containerboard/cartonboard and paper converting respectively. An improved sales mix in containerboard/cartonboard boosted margins as low-margin exports were diverted to the local market as demand recovered. Supply chain issues have caused customers to rely more on local suppliers to the benefit of Mpact. Further insurance proceeds for the Springs mill electricity disruption of R25m were received.
- Margins have been impacted by raw material cost increases (up 12%) and Mpact is planning a 15-16% price increase in October (pricing is negotiated annually on an Oct-Sept cycle).
- Plastics: Revenue up18.3% as volumes recovered by 19% across all businesses. Raw material price increases of 24% have impacted margins, with price adjustments on a quarterly basis allowing a quicker margin recovery.
- Working capital is expected to increase into 2H as inventories normalise. Net debt increased marginally from December 2020 after the share buybacks – we expect this to maintain to December 2021 as working capital should absorb cash.
- We update our earnings and reduce FY21 HEPS due to a higher tax rate (tax offsets finished) and higher raw material costs in both divisions.
- We increase our Target Price to R36.00 as we roll our multiple to FY22 earnings. Mpact remains well positioned competitively.