Mpact to prove itself

Mpact CEO Bruce Strong is confident the company will deliver solid growth. "Mpact is an ambitious company with an exciting future," he says. Mondi's rationale for the unbundling was Mpact's positioning as the group's only paperbased corrugated, container and carton board and rigid plastic packaging producer. "Mpact was not aligned with Mondi's other interests," says Strong.

Mpact's results for the six months to June provide the first real insight into its potential. Annual results for 2011 reflected the drag of a R3,6bn debt burden of which shareholders' loans totalling R2,8bn were converted into Mpact equity a week before its listing in July 2011. Mpact's earnings per share in 2011 were 54c but in the latest six months, they were 63,7c.

By far the biggest contributor in the six months to June was paper-based packaging, of which Mpact is SA's largest producer. The unit's sales lifted 10,5% to R2,4bn while operating profit, pressured by higher costs, was up 5% at R231m - 86% of the R268m group total. In a mature but unexciting sector, Strong says total market packaging volume over the past seven years grew at 1%/year while Mpact achieved 4%/year.

Mpact's plastics unit presents a more positive picture: its sales in the six months to June were up 15%, to R823m, and its modest operating profit of R37m was up 65% on the comparative period. The profit increase, says Strong, was off "a low base". He says Mpact produces 60% of SA's PET (polyethylene terephthalate) bottles. It is also the largest producer of styrene trays used in the retail food sector, and plastic bins used in the fruit farming sector.

Based on analysts' forecasts, Mpact is trading on a forward 10,6 p:e and a dividend yield of 4,3% to December. Investec Asset Management analyst John Thompson says the rating is on the high side for a company he sees as likely to produce only "pedestrian growth".

In the diversified packaging share space, Mpact competes for investor attention with Nampak. In the SA market, packaging volume growth is closely linked to GDP growth. In Nampak's favour is its strong position in Africa and ambitious expansion plans on the continent.

Expansion in Africa is Nampak's key growth driver, CEO Andrew Marshall told the FM recently. In the six months to March, Nampak's African operations grew sales 70%, to R1,04bn, and operating profit 60%, to R142m, 15% of the group total. Marshall predicts the African operations' contribution to operating profit will soon reach 25%.

Mpact also has growth ambitions in Africa. It derives about 10% of its sales (R600m) through its plants in Namibia, Mozambique and Zimbabwe and exports from SA. It aims to double this level in five years, says Strong.

In ratings Nampak has a big edge on Mpact, trading on a forward 14,5 p:e to September, based on the analysts' consensus forecast. This would seem to make Mpact the first choice. But there is another metric to consider: return on equity (RoE).

Mpact's RoE in 2012 will be about 10%, based on the analysts' consensus forecast. Nampak's RoE in the six months to March was almost 23%. This indicates Nampak can fund a higher expansion pace without resorting to debt, or is able to pay a higher proportion of its profits in dividends than Mpact.

For investors who want packaging sector exposure, Nampak's higher RoE makes it the share to back.

Source: Financial Mail