Bending flexibles to profit

2011-05-19 00:00

Packaging company Astrapak [JSE:APK] will have a difficult year ahead in proving to its investors it’s capable of turning around its flexible packaging division, which contributes half of the group’s annual income but left the final year bottom line lacking due to high costs and narrow margins.

Astrapak’s numbers to end-February 2011 revealed a turnover increase of 3,5% to R2,71bn, with its two key divisions – rigid plastics and flexibles – contributing roughly equal amounts. The primary problem with the company is its flexibles division can’t pull revenues through to the profit line due to high input costs, a one-off charge of R45m and aggressive pricing from competitors. The luckless division managed to declare a profit of just R4,7m for the year.

Astrapak chief finance officer Manley Diedloff has assured Finweek that the company is pulling out all the stops in an attempt to turn around its flexibles division, which manufactures consumer products such as refuse bags, shopping bags, food packaging for some of Woolworths’ brands and similar items.

On the cost front, Astrapak is targeting its energy consumption – a key cost push factor it’s unfortunately unable to always pass on to its consumers in time – through electricity saving initiatives. A significant restructuring process has also taken place, with retrenchment payouts included in the one-off R45m fee. That’s hopefully going to result in a leaner business. Some of flexibles’ problems are external, in particular the aggressively competitive market place where smaller players are undercutting prices.

Astrapak is competing with relatively outdated machinery, which places the entire endeavour on the back foot. Therefore, the fact it’s committed R106m from its current financial year’s capital expenditure budget towards updating equipment is good news – but only if there are no additional hidden problems at the division.

“The last thing you want is for them to put in all that capital expenditure into a unit that’s structurally challenged,” says Siphamandla Shozi, an equity analyst at Coronation Fund Managers [JSE:CML].

Diedloff says one of the key reasons flexibles have fallen behind is the technology gap between it and its competitors. “We’re attempting to close that gap through our capex and that will help us to better compete in the market,” he says.

At its current earnings multiple of 12,20 (reported by Bloomberg on 10 May) Astrapak is competitively priced against its chief listed competitor Nampak, which trades at 14,7. And the group’s strong rigids business does support the investment case for Astrapak.

Shozi says: “Something has to happen this year. If it’s able to deliver on the flexible business unit as it promises, then the share is attractive at these levels.”

A further curved ball will be thrown at the company later this year when paper maker Mondi’s packaging arm separates from the parent into its own listing on the JSE, as announced by the company last week. Mondi Packaging SA (MPSA) specialises in rigid packaging, with a bigger variety than Astrapak, which controls around 17% of SA’s rigids market. However, MPSA’s listing ambitions will include aggressive growth in that sector.

Both analysts Finweek spoke to – and Diedloff – are in agreement that MPSA going solo doesn’t immediately spell out bad news for Astrapak, as the currently Mondi-held company is already operating in this market sector.

“We’re still seeing significantly good growth in rigids, as there’s substitution taking place from other packaging into plastics,” says Diedloff. “There are a lot of opportunities for all of us.”

A clearer picture of MPSA’s intentions will probably only become available when it lists, with further details on that being issued later this month, a statement from Mondi says.