Packaging group Transpaco, despite being listed on the JSE for almost four decades, is not a familiar punt for investors.
Even among its packaging peers — Nampak, Caxton, Mpact and Bowler Metcalf — the company tends to be seen as a peripheral play.
It may surprise some that Transpaco is one of the few listings of the Class of 1987 that still has a largely unblemished report card in key subjects such as earnings and dividends. Other perennial performers — and there are just a few left — from the late-1980s listing boom would include redoubtable contenders such as Combined Motor Holdings, Spur Corp and Bowler Metcalf.
These listings have a few things in common — a singular focus on core operations and disciplined capital allocation coupled with strong cash flows, steady management and a reluctance to take on the trappings (large head offices, for instance) of the big corporates.
Transpaco has all these attributes and then some; the group has a lean and mean culture that might put even renowned Spartan operators such as Caxton to shame.
But it did not have its best year in the period ended June. Revenue trickled down 4% and bottom-line profits slumped almost 14%, with the full-year dividend pared to 240c a share (2023: 360c a share).
Despite this tougher trading period, investors — including Old Mutual, which now owns a 15.19% stake (up from 12.68% as at the 2023 annual report) — seem to like what is on offer at Transpaco. The share has shifted up more than 20% over the past three months and is not far off its all-time high of R40.
The performance slip in Transpaco’s past financial year was not entirely unexpected. The business lull before the election and the high levels of load-shedding hampered revenue growth. Higher inflation and tighter interest rates also stifled business activity — the packaging sector is closely aligned to economic growth.
The group can certainly accommodate a sizeable niche acquisition; the balance sheet is in sturdy shape
It’s worth noting, however, that the dip in revenue to R2.5bn was at least partly due to Transpaco’s plastics division seeing the termination of an export contract in the refuse bags business. What’s more, the company had to cope with raw material price deflation in the pallet wrap operation and the impact of reduced consumer spend on retail bag volumes. The paper division grew its top line by a sliver.
Under these trying conditions there was an inevitable margin squeeze from almost 10% to 8.6% — and the result was that Transpaco’s operating profits fell almost 16% to R213m.
Transpaco’s fortuitous share buyback cushioned the earnings fall on a per share basis — headline earnings dropped 8% to 521c.
The quality of Transpaco’s earnings remains sound, with net operating cash flow of R283m well in excess of reported operating profit of R213m.
Is the market correct in expecting better trading days for Transpaco? Taking load-shedding out of the equation should already provide a pleasant shock in the traditionally stronger first-half trading for the 2025 financial year.
At last year’s AGM Transpaco CEO Phil Abelheim was fairly blunt around the frustrations of disruptive power supply. “At some points at stage 6 load-shedding we were on for two hours and off for two hours. It takes an hour and a half to warm up an extruder. So, you sometimes have 30 minutes of production … which is untenable.”
At the AGM he also disclosed that the maintenance bill had increased markedly. “Every time you restart a machine and every time a machine heats up and cools down, we get the risk of blown motors and drives. The cost of spares is becoming enormous.”
In his forward-looking comments on the end-June 2024 results, Abelheim says Transpaco will target organic growth while maintaining strict financial control. Identifying and pursuing appropriate acquisitions is still on the cards.
There was talk last year of Transpaco taking a gander at some of Nampak’s noncore operations. This was confirmed by Abelheim, though nothing has transpired.
Transpaco has previously made good returns from assets acquired from Nampak. The group bought Nampak Flexibles in 2006, and in 2010 it took over Disaki Cores and Tubes, as well as Cleveland Packaging and Global Packaging (for the princely sum of R30m).
At last year’s AGM Abelheim said Transpaco had looked at 30 to 40 companies as possible acquisition targets, but “there was not very much that was of interest to us”.
The group can certainly accommodate a sizeable niche acquisition; the balance sheet is in sturdy shape, with gearing still net positive.
With signs that the economy could (touch wood) continue to perk up under the government of national unity, there won’t be too much pressure on Transpaco to make an acquisition or three. A resumption in profit growth will suffice, because that should see a richer dividend flow.
With the forward and trailing earnings multiple both sitting around 6.3, Transpaco is nicely poised for a strong run if the interim numbers are encouraging.
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