Overview of MEPCO’s financial position, potential projects, use of subscription proceeds

Logo of Middle East Paper Co. (MEPCO)

Middle East Paper Co. (MEPCO) recorded a compound annual growth rate (CAGR) of 14.39% on invested capital from 2018 to 2022, according to the company’s investor presentation.

MEPCO reported a return on invested capital of 17.77% by the end of 2022, compared to 17.59% in 2021, as the following chart shows:

The company recorded the highest revenues and profits on record during 2022, with revenues increasing by 12% year-on-year (YoY) to SAR 1.2 billion and profits of about SAR 270 million. This was attributed to rising paper selling prices and pent-up market demand.

The following table shows some items of MEPCO’s income statement from 2018 to 2022:

Lower selling prices of papers globally hampered the company's financials during the first nine months of 2023, owing to political and economic events that impacted the dynamics of demand and supply. This weighed on prices, as per the CEO’s previous statements.

MEPCO's revenues plummeted by 33% in the first nine months of 2023 as it incurred losses of about SAR 45 million due to a global decline in packaging paper prices as well as a 59% YoY rise in finance costs.

MEPCO's CEO, Sami Safran, recently told Argaam that the company’s performance is expected to stabilize in Q4 2023 and to maintain the sales volume of the packaging paper business.

He also expected Juthor Paper Manufacturing Co.'s higher operating rate and sales volume to contribute to the group's higher sales revenues.

MEPCO said in its prospectus that the capital hike will enhance the company’s strategic growth initiatives that it intends to take.

It further explained that the capital increase will allow it to solidify its position as a giant national firm in the Kingdom's integrated paper and packaging sector.

The move also aims to strengthen the company's global brand position and qualify it to be a major player in the waste management and recycling sector, which directly contributes to the Kingdom's Vision 2030.

In addition, the capital increase will boost the company’s opportunities to obtain resources for studying the possibilities of external growth through mergers and acquisitions (M&As), which are beyond its field or capabilities at present.

It will also help finance new factories, including the paper production plant (PM5) and the tissue production plant (TM6), which will meet current and future demand for cardboard paper and tissue products in the local and regional markets.

Moreover, it will be utilized in the acquisition of a group of assets and shares of existing facilities in the manufacturing and supply of corrugated board to achieve vertical integration.

MEPCO expected the net proceeds to reach about SAR 620 million after deducting the offering costs, as the company intends to increase its capital from SAR 666.67 million to SAR 866.67 million by issuing 20 million new ordinary shares while suspending the rights issue.

The Public Investment Fund (PIF) will subscribe to all new shares at a price of SAR 31.50 per share. The fund’s ownership in the company’s capital will reach 23.08% after the capital raise, MEPCO stated.

MEPCO confirmed that it aims to achieve vertical and forward integration and create a stable demand for cardboard paper in its markets.

The company's competitive ability is determined by the extent to which its products distinguish themselves from other products on the market by offering high-quality products at reasonable prices.

MEPCO relies mainly on wastepaper as the main raw material for its products. It produces diverse packaging and specialty paper products for the packaging, construction, furniture, basic paper, and industrial paper industries.

The company purchases the bulk of its needs, 80% of raw materials and paper waste, from its subsidiary, Waste Collection and Recycling Co. Ltd. (WASCO), which in turn purchases materials from the local market at competitive prices, providing a steady supply of fibers to meet its manufacturing requirements.

It is expected that approximately 28.2% of the net proceeds from the subscription will be allocated to cover capital expenditures for the PM5 plant. It will include a high-speed container board production machine with a net production capacity of 400,000 tons, which will represent the largest expansion the company has witnessed to date.

The total cost of the PM5 paper production plant is estimated to be SAR 1.77 billion, of which SAR 1.59 billion will be self-financed or financed through bank loans. The project is expected to be completed in Q4 2026.

The TM6 plant will require about 24.8% of the net proceeds from the subscription, according to the company.

TM6 plant will enhance the company’s production capacity by approximately 60,000 tons of sanitary paper rolls (jumbo rolls) for the final production of tissues, facial tissues, and sanitary paper tissues.

The total cost of the TM6 plant exceeds SAR 373 million, of which SAR 154 million will be self-financed or financed through bank loans. The project is scheduled to be completed in Q2 2026.

MEPCO is communicating with several external parties to discuss potential acquisitions, and thus raising its integrated production capacity to 50%.

It targets to utilize a total of 47% of the net proceeds for the purpose of acquiring a group of assets and shares of existing establishments in the field of manufacturing and supplying corrugated cardboard to achieve forward vertical integration.

This will allow the company to convert container board into cardboard boxes, and thus giving the company a leading position in the Saudi and regional market in the field of sustainable and integrated paper and packaging.

MEPCO forecasts that a positive impact to show on the company’s net operating profits during H2 2024.