Pro Pac Packaging announced its quarterly results last week 

 Since my last post on this Company more than 2 years ago, the share price has performed poorly with a more than 90% decline in value. Like other Companies in this sector (Pact Group, Orora) the sector is suffering from negative investor sentiment. Pact Group was delisted earlier this year after a takeover bid by their largest shareholder- Kin Group, owned by Raphael Geminder. Pro Pac has not helped its cause either. The last few annual reports have blamed volatile resin prices, high shipping costs, disruptions in the labour market, Covid and poor consumer sentiment for the declining profit. Most tellingly, sentiment has been influenced by high debt levels incurred during a period of aggressive expansion under Chairman Ahmed Fahour in 2017/2018. With higher interest rates, management has had to take decisive action to shed debt. This has included capital raising through a share entitlement offer, closure of some manufacturing sites and divestment of what was initially a plastics distribution business. They have also consolidated debt using a syndicated debt facility. Borrowings have reduced from over $100M four years ago to $23M today. 

 The Company has had its share of misfortune too. The Middle East war has incurred lost revenue of $30M from a major customer- Israel. 

 Notwithstanding, I think there are a lot of positives which have been overlooked by the market. These include:

 1.   The Company continues to gain market share in a growing segment of the plastics market- flexible packaging. Flexible packaging supplies everything from bags, pouches, liners and wraps to rollstock. It has rapidly replaced glass, rigid plastic and cardboard because it is lighter, makes the items easy to pack and transport, preserves the freshness of the product and requires less raw material to produce. This lowers manufacturing cost and waste. It’s transparent, can be labelled and branded and can be engineered to suit the client’s requirements. Laser Perforation creates high precision holes in the packaging which allow the produce to breathe. In Agriculture and Horticulture, bales and fodder have UV properties that protects bales and fodder from extreme weather conditions and preserve a viable product. 

2.   The Company remains committed to its vision of becoming a leading flexible plastics manufacturer, distributor and recycler. Flexible plastic manufacturing in Australia is a fragmented industry. Pro Pac presently has about 15% of the flexible plastics manufacturing market in Australia, a market a with CAGR of 4%.

3.   The Company is leading soft plastics recycling in its industry. Integrated Recycling is an entity of Pro Pac and is building a plant in Albury to recycle 15,000 tonnes annually of stretch film, shrink products, bulk plastic like sileage and pallet wrap into polytensilate. This substrate will be used to recycle 50% of plastic content into the Company’s products. This is above the 30% component established by the 2025 National Packaging Targets and gives The Company the credentials to promote itself to clients as environmentally focussed and intent on participating in the circular plastics economy. The recycling plant was part subsidised by a $13.9M government grant.

4.   In addition, the Company presently down-cycles hard plastics into useful products like railway sleepers (Duratrack), plastic furniture, decking and boardwalks. 

 My feeling is that plastics, or some form of plastic-like packaging, will continue to be with us for the foreseeable future. Biodegrable plastic has received a lot of hype but has failed to live up to expectations. For the time being, the focus is on increasing recycled content through technological improvements in manufacturing, more selective packaging, improved waste collection and sorting and specialised recycling. As I discussed in my previous article, dumping our plastic waste on Asia or tucking it into landfills is no longer a viable option. Asian countries don’t want it and landfill is becoming too expensive. It is also unsustainable to the planet. 

 Companies like Pro Pac should be enjoying better consumer and investor sentiment. I think they could do a better job in marketing themselves to ethical investing funds and to the general investing public. Investors Mutual has been selling down their share on the open market which has weighed on the share price. The Company has a market cap of $17M at today’s price and an enterprise value of $41M, despite a tangible asset value of $100M.

 In conclusion, Pro Pac is heading in the right direction in steering itself towards flexible packaging. Flexible packaging is fundamental in enabling the trend towards fast moving consumer goods and is integral in the Agriculture and the Food industry. It is ahead of its peers in becoming an integrated manufacturer and recycler. It is leading the way in recycled content which will give it a marketing advantage in negotiating new contracts with companies like Woolworths, Arnotts or Coca Cola who are keen to show their sustainability ethos to consumers. It needs to have a disciplined focus on reducing debt, keeping costs down and maintaining working capital. If it gets through this period, it will emerge stronger. Its value will be realised when sentiment turns back towards the sector. I am concerned that a forced takeover by its largest shareholder may occur at current prices and I am keeping a nervouse eye on things until the share price recovers.

Disc: I hold shares on SM and in RL