Mpact’s first-half headline earnings — up 33% — belie the fact that sales volumes actually went backward, while debt rose to more than R2.6bn. But some canny investments, and a little luck, have cushioned the packaging group from the worst of the knocks and bangs. The FM spoke to CEO Bruce Strong.
Your gearing ratio has come down, even as net debt has gone up in absolute terms. But debt’s expensive, and it cost you R131.7m in finance charges (from R81.8m last year), so why would you pay a dividend under those circumstances?
The board is cognisant of the fact that we are investing substantially in the business. At the same time we’re very confident about the sectors we’re investing in and you want to demonstrate that confidence, and consistently applying a dividend is important for shareholders. Our policy is to pay out three times cover over the cycle, and this dividend is more than four times, which means it is quite conservative. Our gearing is about 34%, which is manageable.
Debt’s not a bad thing for shareholder returns provided it doesn’t put your company in jeopardy, and as we’ve demonstrated, our earnings are growing quicker than our debt — which we say will peak probably towards the end of the year or early next year. Thereafter we see quite a rapid degearing, even in a difficult market. Also, our projects are not stay-in-business stuff — these are growth projects in a market that’s not growing.
Do you also feel you have to keep shareholders on board given how jaundiced the view is towards South Africa Inc mid- and small-cap companies?
When we’re considering the dividend and allocation of capital, I think it’s about bringing some sense of consistency. Of course you want to keep investors happy, but the most important thing is to protect your company — and that’s the best way to look after investors.
Your project pipeline is worth about half your market cap, which speaks to just how depressed your shares are. Does that infuriate you, or do you just accept that’s how it is on the JSE now?
It doesn’t infuriate me. My job is to seek out the opportunities, take the opportunities and manage the risks. Price discovery is hard with the volumes that are being traded, but if I had to obsess about that every day then I’d take my eye off the ball in the business. We’re one of the few seeing real growth opportunities and that’s demonstrated in the numbers.
Coupled with that, we’ve also got our solar projects, which were started long before it became fashionable and before load-shedding, and those are paying off.
Given that you were investing in solar ages ago, do you say other companies have been too quick to blame their woes on Eskom? Using load-shedding as a fig leaf for bad business decisions?
No, I don’t. Our investments in solar early were not related to planning for Eskom. You know why we did it? About 2015 when we had the Jacob Zuma-Nhlanhla Nene situation, we looked at our scenario planning, and said: “We’re in a low-growth environment, there are few opportunities and it’s looking very tough: what are we going to spend our money on in the short term?” So we said: “Let’s do all things that are self-help.”
Solar wasn’t about the supply of electricity, it was about reducing cost. And when we rebuilt our Felixton paper mill in 2017, we rebuilt it to take advantage of cheaper energy tariffs. It’s a 24/7 operation, and we built part of the plant so that it could build stock in the day, and didn’t have to run during the peak period at night. In retrospect it turned out to be a great solution in terms of load curtailment.
We bought back properties, we bought back shares, and then suddenly we saw during Covid that growth in the fruit sector was materialising. We saw some sectoral trends that were benefiting us — home shopping deliveries, the move out of plastics into paper. It was fortunate.
So do those remain the growth areas for your business? Fruit exports, convenience shopping, and so on?
Yes. And also the move to more recycled projects — that’s directly in our front yard. People talk about ESG; it’s not ESG for us, it’s just our business. And the same for waste management — making wheelie bins, for example. You don’t need a lot of consumer spending to see growth in those sectors.
Have you benefited from Nampak’s calamities?
We bought R40m of equipment from them earlier this year. We weren’t guaranteed any customers or contracts, we’ve got none of that; we had to go and fight in the market for that. During the past five or six years in the sectors where we were competing, specifically bins and crates, we’ve invested a tremendous amount and we’ve been able to capture a lot of that market.
And then there’s Caxton. It’s a 34% hostile shareholder in a state of permanent stand-off — will this continue for the foreseeable future or is there any resolution on the horizon?
Let’s start philosophically. Our board has been consistent in that all it takes is for an offer to be evaluated and then we’ll make a recommendation to shareholders, and that hasn’t transpired. In the absence of that, the key thing is to run the company to maximise value. And while they’re a shareholder, hopefully they make some value. I can’t say what they’re planning, but … we’ll respond to what comes from them.
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