Pact Broken as Higher Costs Hit Earnings

For the second time in six weeks, shares in Melbourne packager Pact Group (ASX: PGH) have fallen sharply on weak trading news.

The shares fell more than 12% on Monday afternoon after the AGM heard that underlying earnings will be lower than last financial year with the company because the company has been unable to pass on higher costs.

Pact shares dropped to a low of $2.50. They ended at $1.56, down 12.6%.

Pact CEO, Sanjay Dayal told the meeting volumes across most of its businesses have been generally in line with expectation despite the disruption arising from raw material shortages and pallet availability.

However, maintaining continuity of supply had required the company to increase working capital in some areas. He said some business segments were struggling to offset the impact of higher input costs on earnings in the first half.

“For the Group, we expect Underlying EBIT in the first half of 2021-22 to be around $80 million. Excluding the Contract Manufacturing segment, this will be around $5 million lower than the prior year,” Mr Dayal said.

A further update on earnings expectations for the current financial year will be provided at the Company’s half-year results in February.

In mid-October, Pact shares also fell 12% in a day after it revealed that news a major asset sale has fallen over, thanks to the pandemic’s lingering effects.

Pact announced that it had ceased the sales process of its Contract Manufacturing businesses because the division was suffering weaker demand and lower margins due to higher input costs.

At the same time parts of its businesses were dealing with higher raw material and international freight costs. Those remain problems, judging by Monday’s update.

Pact says in October that demand had remained resilient in the Packaging & Sustainability and Materials Handling & Pooling segments for the first quarter, “with higher raw material and international freight costs well managed.”

The Contract Manufacturing segment demand was weaker than expected, impacted by COVID-19 lockdowns, and margins were lower due to higher input costs.

Those costs continue to be a burden, judging by the latest update.


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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