Pact chief hints at potential sale of contract manufacturing arm

Pact boss Sanjay Dayal has hinted at a potential sale of parts of the business as the packaging company fast-tracks investment in new and upgraded facilities.

Pact Group chief executive Sanjay Dayal. Picture: Ryan Osland

The chief executive of packaging company Pact Group has hinted at a potential sale of parts of the business as it fast-tracks a capital investment program designed to boost the company’s environmental credentials.

Pact reported on Wednesday that it had beaten its earnings guidance for the first half, but confirmed that shareholders would miss out on a dividend as the company looked to reduce debt and preserve cash for capital projects.

Underlying EBIT for the six months to December came in at $75m, 3 per cent higher than the top of the guidance range provided at the company’s AGM in November.

Pact spent $65m on capital projects in the first half, designed to increase capacity and boost the level of recycled content in its packaging products.

Chief executive Sanjay Dayal said the accelerated investment was behind the board’s decision to hold off on a payout to shareholders, but a dividend would likely be paid at the end of the financial year.

“Due to the cash requirements of this program, which will ease before year end, our board has made the prudent decision not to pay an interim dividend,” Mr Dayal told analysts on Wednesday.

“The board will reassess our position at year end, and at this stage it is the intention of the board to pay a full year dividend.”

Mr Dayal said the board was working towards a payout ratio of 40 per cent of underlying NPAT.

Pact’s contract manufacturing arm, which provides manufacturing services for the home care, personal care and health and wellness sectors, is the fastest growing of three divisions, with revenue up 18 per cent to $176.6m.

Higher costs have posed a challenge but current forecasts suggest underlying EBIT will turn positive for the division for the full year, with the company aiming for an $8m turnaround from last year’s loss.

Asked whether the improved performance was likely to generate renewed interest in a potential sale of the division, Mr Dayal said the company was “considering the make-up of our portfolio as our strategy evolves”.

“We are looking at the portfolio – some parts are very close to strategy, some parts we are thinking can we monetise them?” he said.

“We already know the history around the contract manufacturing, so yes that is ongoing, but right now for contract manufacturing we are focusing on stabilising it.

“Longer term we would be looking at monetising parts of the portfolio so we can execute our strategy faster and really deliver on our targets around the strategy.”

The contract manufacturing division has been up for sale before through investment bank Citi, although the process was shelved when interest was not at the right price.

Chaired by billionaire Raphael Geminder, who owns a 49.8 per cent stake in Pact, the company’s overarching strategy is to “lead the circular economy”, through its reuse, recycling and packaging services.

Its largest division – packaging and sustainability – manufactures and supplies plastic and metal packaging products to customers in Australia, New Zealand and across Asia.

Pact is looking to increase average recycled content in its plastic packaging products to 30 per cent by the end of 2024-25, and aims to reduce its Scope 1 and 2 greenhouse gas emissions in Australia and New Zealand by 50 per cent by 2030.

On Wednesday Mr Dayal confirmed the company had formalised a deal with Woolworths to supply recycled plastic packaging for the supermarket giant’s home brand products.

Pact reiterated its guidance for the full year, with underlying EBIT expected to be slightly higher than last year’s $156.2m. But the company noted the “demand outlook is uncertain”.

Shares were trading 2.7 per cent higher in afternoon trade on Wednesday at $1.04.