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Merger The Ideal Packaged Solution
BY TIM BOREHAM - 20/09/2017 | VIEW MORE ARTICLES BY TIM BOREHAM

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PPG - PRO-PAC PACKAGING LIMITED


Manufacturing isn’t dead in Australia: it’s just employing far fewer workers.

But we’ll come back to that one.

A feature of the niche packager’s acquisition purchase this week of a bigger private rival is that it transforms Pro-Pac from mainly an importer and distributor, to the proud owner of eleven local manufacturing sites plus one in New Zealand.

Controlled by Anthony Pratt’s brother in law Raphael Geminder, Pro-Pac is paying $177.5m in cash and scrip for Integrated Packaging Group (majority owned by private-equiteer Advent Partners).

Chaired by former Australia Post boss Ahmed Fahour, the thinly-traded, $95m market cap Pro-Pac will emerge as a substantive player in flexibles – the fastest growing game in packaging.

“We become a market maker rather than a market follower,” CEO Grant Harrod says.

Turnover wise the enlarged company will account for about 25 per cent of the flexibles sector, which in turn accounts for about 10 per cent of the $20-22bn a year domestic packaging sector.

When it comes to everyday boxes, PET bottles and cartons, the broader sector remains the preserve of the much bigger Amcor, Amcor spin-off Orora, Pact Group (also controlled by Geminder) and the unlisted Visy Industries.

Flexibles are the unsexy cousin to consumer-oriented covering such as printed laminated chip packets. Think of the shrink-wrap around a six-pack of stubbies, meat trays or sheathing around hay or cotton bales.

But the real growth is in what Harrod dubs the “unitisation” of fresh food” pre wrapping items such as a bunch of grapes or a handful of carrots.

This trend won’t leave the greenies ‘rapt’ at all, but Harrod argues the practice means that far less food is wasted and the produce is protected from tampering.

For the food makers, shrink wrapping can mean huge savings: it costs a brewer about 20c to wrap the bottles in those fibre carry crates, but only about 2c to shrink wrap them. Yet only 20% of beer is plastic wrapped and that implies market share upside. As for those labour costs, workers account for only about 5% of Pro-Pac’s cost of goods, compared with 15% for energy and 70% for the resins.

Because rivals who import buy the same $US-denominated resins, they can really compete on labour and the cost difference is marginal. A former CEO of L.J. Hooker, Salmat and Corporate Express, and Harrod was hired in May to bulk up Pro-Pac – and one has to say ‘mission accomplished’.

But the flexibles sector remains fragmented across dozens of specialist suppliers, so Pro-Pac is likely to open its cheque book again. Pro-Pac is an ASX rarity because the other smaller packagers have been acquired and delisted: Colorpak early last year after being bought by Graphic Packaging of the US; and National Can Industries in 2012 after the minorities were soaked up by Geminder’s Bennamon Pty Ltd.

Pro-Pac has underperformed, with two earnings downgrades this year: not a state of affairs the billionaire Geminder and fellow director Gary Weiss would tolerate.

But with the merger expected to deliver immediate earnings per share growth of 18%, Harrod may well have found the ideal packaged solution.



View More Articles By Tim Boreham

The New Criterion is authored by Tim Boreham.

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades' experience of business reporting across three major publications.

Tim Boreham has now joined Independent Investment Research and is proud to present The New Criterion, which will honour the style and purpose of the old column. These were based on covering largely ignored small to mid cap stocks in an accessible and entertaining manner for both retail and professional investors.

Disclaimer: The author nor Independent Investment Research have received a fee or any kind of inducement for this article. The New Criterion is not intended as specific investment advice and readers should contact a licensed financial adviser.



 

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