Transpaco says selective deals will boost growth

Major South African paper supplier Sappi is just one example of a company which was predominantly in paper but is now focussing more and more on packaging.

Transpaco released its financial results for the year to June on Wednesday (21 August). The group posted a 1.3% increase in diluted headline earnings per share (HEPS)‚ to 203.7c‚ for the year to June. Last year the diluted HEPS were up 3% to 201.1c.

Chief executive Phillip Abelheim said Transpaco was facing various challenges in the year ahead. "The company maintained its consistent performance with good turnover growth and a slight increase in headline earnings per share despite challenging trading conditions‚" he said.

Abelheim said this was caused by margin pressure from higher input costs‚ increasing competition‚ and possible labour disruptions in some of the markets. "There are new companies coming in but some have made acquisitions, which have not gone so well for them down the line. As such‚ we are careful not to repeat mistakes. We would rather seek to grow earnings than just to buy a company and double our turnover‚" Abelheim said.

Plastic division fares poorly

The group's operating profit increased in the paper and board divisions‚ with a decline in the plastic division resulting in group operating profit of R93.1m.Last year it made a profit of R95.7m.

Transpaco's total comprehensive income barely moved‚ edging 0.5% higher to R66.9m from R66.6m. It said transport and mining strikes during the year had adversely affected some of its markets.

"There are just many risks around but we are looking for acquisitions in recycling‚" Abelheim said.

BPI Capital Africa analyst Brent Madel was disappointed with Transpaco's performance. He said that even though the overall revenue numbers were in line with BPI's estimates‚ as were the paper margins holding up just above 12%‚ the plastics business saw earnings before interest and tax decline from 8.5% last year to 5.2% this year.

"The financial report does not offer too much of an explanation for the decline‚" said Madel. He said that in light of the weaker rand and more expensive plastic bag imports‚ they had forecast a less competitive market‚ but that had not appeared to assist the company's performance.

BPI had a hold position on the share but this could change in the coming weeks‚ he said. "While the performance is somewhat disappointing the group has R84m in cash resources and is only 13% geared.

"The upside could be the 12.5% increase in dividend for the year to 90c‚ placing the stock on an attractive dividend yield of 5.3%. With the prospects remaining challenging‚ we are likely to lower our financial year diluted HEPS‚" Madel said.