Transpaco - a JSE microcap to wrap your head around
There is a microcap listed on the JSE, that you might not know about, but you most likely handle one of their products every single day…let that sink in…Every. Single. Day.
From grocery packets, dustbin bags, cling wrap, Sellotape and pharmaceutical boxes; it is difficult to fathom how much this small cap is intertwined into our daily South African lives.
This week I am delving into Transpaco - a family run multi-million Rand business boosted with a majority black empowerment shareholder that is a trade union (nogal!) that quietly sticks to its knitting in the plastics and paper packaging industry.
Transpaco offers the investor a great defensive play in consumer and industrial markets because even through the hardest of lockdowns, two years ago, their business did not shut down as it was deemed essential services. Not only did they NOT shut down during that period, but they were able to effortlessly add a whole product line of personal protective equipment (PPE) which piggy backed off Transpaco’s strong distribution network resulting in them selling additional products to their existing customers.
Now let’s discuss South Africa’s “national flower”…the plastic packet (Ritch et al. 2009). Since 2003, the South African government has imposed a tax on the use of plastic shopping bags to discourage customers from using them and to curb littering. In Tito Mboweni’s 2020 Budget speech, he increased the plastic bag levy by 108% (from 12c to 25c) and yet Transpaco recorded bumper sales in plastic packets in their recent results and, through my own observation, the R6,50 Woolworths black material bags just proves that these grocery bags are somewhat price inelastic; consumers just can’t do without them!
In addition to the above, Transpaco will continue to be resilient even though the consumer is under financial pressure, as they will still use Transpaco products like garbage bags and over the counter (OTC)medicine (pharmaceutical packaging and paper inserts) and we have seen an uptick in e-commerce of our South African retailers resulting in an increase in demand for Transpaco’s courier bags, boxes, fillers and packaging tape.
On the industrial side, Transpaco is the largest supplier in South Africa of plastic pallet wrap. It’s mind boggling to think of these massive rolls of pallet wrap sitting at the end of production lines of FMCG companies just before the exit door of a loading bay where inventory packed on pallets will be wrapped and loaded on a truck to be transported to various retailers’ distribution centers…and this is just one industry Transpaco sells to.
Even though I am painting this nanocap company in glory, there are various threats to this business which will affect its future margins. The most obvious one is the recent high price of oil as it is an input cost into their plastic products and increased transportation costs will gnaw into Transpaco’s margins. One has to keep in mind, Transpaco manufacturers mostly generic products, which makes it easy for their customers to substitute with cheaper imports, but due to their strong BEE rating and extensive distribution network it makes it difficult for their competitors to gain competitive advantage. Worldwide an “anti-plastic” debate is raging on where there is major concern over the negative environmental impact of clingwrap and pallet wrap. In China, they are currently investigating reusable pallet wraps to be used in manufacturing and logistics that may pose a headwind for Transpaco in the future.
With the challenges in hand, I have good faith that management will offset rising costs through manufacturing efficiencies and due to consumer blasé attitude towards plastic packets could comfortably sneak price increases to protect its comfortable margins.
Even though Transpaco is a fairly illiquid share, it is worth a look as it trades at a PE of 5x; has robust margins because even though sales increased by 10%, operating profit jumped to 38%. To top it all off Transpaco has a dividend yield close to 8%!
Click the link below to see a company overview of Transpaco :
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