Key message: Investments in capacity should ensure organic growth over the medium-term.
- Mpact released a Trading Update. HEPS from continuing operations is expected to be down 18-28% to 88-100c.
- Takeaways from the Trading Update: The update is weaker than expected with challenging market conditions and weak consumer demand.
- Revenue in the Paper division increased by 7%, with higher containerboard sales offset by lower cartonboard and corrugated sales. Although no commercial downtime was taken at Felixton and Mkhondo, operating profit must have fallen by 10-15% (higher recovered paper, energy and fixed costs). Margin pressure is evident in the weak market.
- Revenue in the Plastics division fell 15% with Wadeville’s sales down significantly after the expiration of two contracts with a major customer. While some replacement volume has been found, the uptake has been slower than expected. Bins & Crates sales were down. FMCG sales were good.
- Overall EBITDA and operating profit are expected to decline by approx. 15% and 26% respectively.
- Mpact has invested in growth projects in both the Paper and Plastics divisions and remains well positioned for a recovery in demand. The balance sheet has not been overly geared for these projects with net debt/EBITDA expected to be around 1.7 times.
- The update implies a weak consumer market for Mpact’s products and we have reduced our forecasts accordingly. We reduce our Target Price to R30.80 (from R36.50).