Low sales, drought and mill downtime affect Mpact interim earnings

JSE-listed packaging company Mpact’s results for the six months ending June 30 will be negatively impacted on by lower sales volumes in the paper- and plastics-converting businesses, lower domestic containerboard and cartonboard sales volumes and higher recovered paper costs.

In addition, the scheduled downtime of the R765-million Felixton paper mill upgrade project, which is due to be completed during the second half of the year, will result in nonrecurring additional costs and lost contribution.

The company said on Monday that a decline in sales volumes in the converting businesses was attributable to muted consumer demand across most sectors, as well as the impact of the drought on fruit volumes.

“Lower domestic containerboard sales are a continuing consequence of certain customers reducing their purchases after increasing capacity in their own paper mills during the second quarter of 2016,” noted Mpact.

This increased capacity also resulted in a shortage of recovered paper in the domestic market and consequential higher market prices, which could not be recovered in selling prices.

As such, Mpact expects to report a 55% to 74% decrease in its basic earnings and headline earnings a share to between 42.8c and 24.7c, respectively.

In estimating the effective tax rate and the resulting earnings for the period, Mpact has not included any recognition of the unrecognised assessed losses pertaining to the Mpact Polymers business or the Section 12i tax incentive relating to the Felixton mill upgrade project, which depends on the company meeting certain requirements after commissioning.

As at December 31, the unrecognised assessed losses attributable to Mpact Polymers, in which Mpact has a 79% shareholding, amounted to R265-million. It is estimated that once recognised, the Section 12i tax incentive for the Felixton mill upgrade project will increase earnings a share by 69.7c.

The recognition of these benefits will be reconsidered during the second half of the financial year.

“Once complete, the Felixton upgrade project will significantly improve our cost competitiveness, product quality and product offering in the recycled containerboard and corrugated markets, offering products that currently have limited availability in South Africa,” the group highlighted.