Published Date: 2021-08-06 | Source: INCE|Community | Author: The Finance Ghost
This sector definitely can't be accused of unsynchronised reporting. Sappi, Mondi and Mpact all released updates yesterday.
Sappi manufactures raw material offerings (like dissolving pulp, wood pulp and biomaterials) and end-use products in the form of various types of paper. Interestingly, many of the operations are energy self-sufficient, with production facilities powered with bio-energy from steam and existing waste streams.
That all sounds very exciting, but I'm afraid that the market didn't like this quarterly announcement. Sappi fell 5.99% after reporting results for the third quarter ended June 2021.
This means that we now have a view on nine months of the 2021 financial year. Revenue over that period is up 9% and EBITDA excluding special items is up 20%. However, the group is still loss-making overall.
The quarterly EBITDA trend is encouraging, with third quarter EBITDA of $145 million well up on the second quarter result of $112 million. This took the third quarter to a net profit of $18 million although the year-to-date result for 9 months is a net loss of $22 million.
The group benefitted to some extent this quarter from higher dissolving pulp prices. For example, hardwood dissolving pulp fetched a 19% higher price in China vs. the prior quarter. The group's major contracts are structured in such a way that actual revenues lag the higher prices, so much of this benefit is still to come next quarter. Unfortunately, volumes were down 14% due to operational challenges and global logistical issues.
A focus on packaging and speciality grade paper has worked well for Sappi, with this segment now contributing almost half of group EBITDA. Volumes in this space were up 23% vs. the comparable quarter in the prior year.
Input cost inflation in Europe and a lag in selling price increases had a negative impact on EBITDA in the graphic paper segment.
Capital expenditure was comparable to previous quarters at $79m. The group is bullish on its balance sheet, noting that net debt is lower and liquidity remains strong.
The group has warned that the riots in South Africa have negatively impacted production, with an expected $16 million negative impact on EBITDA in the fourth quarter. The overall outlook for the final quarter is encouraging but there are risks from further Covid-related disruptions and the impact of higher input costs and global logistical challenges. The group expects fourth quarter EBITDA to be higher than in the third quarter.
Sappi is up around 22% year-to-date.
In contrast to Sappi, Mpact had a positive market response to its interim results for the six months to June 2021. The share price closed 3.5% higher as investors celebrated a result with revenue up 16.3% and operating profit up 165%.
With timeous share repurchases to the value of R257m, Mpact helped drive an extraordinary increase in earnings per share from just 9 cents in 2020 to 120.8 cents for the latest period.
Return on Capital Employed (ROCE) jumped to 15.6% and gearing was reduced to 27.6%, so critical metrics are all headed in the right direction. Net finance costs were significantly lower due to the double-whammy of lower interest rates and a reduced debt balance.
The company notes that customers are increasingly looking for sustainable local solutions rather than relying on imports. The localisation of supply chains is a strong driver for Mpact, especially as South Africa has a well-developed consumer and agriculture economy.
To support this, Mpact has previously announced an investment of R500m in local capacity.
On a segmental basis, the Paper division saw revenue grow 15.8% thanks to sales volumes growth of 12.7%. This was supported by recoveries in the industrial and quick-service restaurant sectors. Anticipated growth in citrus volumes will be a further driver in the second half. This revenue jump helped operating profit increase 88.6%.
The Plastics business achieved revenue growth of 18.3% and a return to higher gross profit margins. Operating profit swung from a loss in the prior period of R17.7m to a profit of R34.6m.
The looting had a confirmed impact of R20m on gross profit and a possible further impact of R20m unless lost sales are recovered by year-end.
Mpact's net asset value per share is R24.10 and the company has been buying back shares at an average price of R13.71. For that reason, there is no interim dividend, as the company will continue to pursue a share buyback strategy.
Mpact's share price is up nearly 90% year-to-date.
Mondi also released an interim result for the six months to June 2021 with a positive response from the market, as the company closed nearly 3% higher.
Sales volumes and prices were higher, although revenue growth was still modest at 5%. The group notes that there was "effective cost control", yet underlying EBITDA still decreased by 4% as EBITDA margin fell from 21.4% to 19.5%. Profit before tax fell by 1%.
With a debt balance of 1.5x EBITDA, the business has been able to invest through-the-cycle with expansion into the Turkish corrugated market. There have been other important capex projects including an upgrade to the containerboard mill in Finland.
The strength of the balance sheet has allowed the company to increase its interim dividend by 5% although I'm not sure that's a great move when profit is down. Return on Capital Employed (ROCE) dropped from 17.1% to 14.8%.
With interim Headline Earnings Per Share (HEPS) of 70.7 Euro cents per share, annualised HEPS at current rates would be around R24. At yesterday's closing price, that's a P/E of 17x. The group will need to return to profit growth quickly to keep supporting this multiple.
Mondi is up around 14% year-to-date.