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Pro-Pac Packaging share price jumps 14% on COVID-19 trading update

The Pro-Pac Packaging Ltd (ASX: PPG) share price is charging higher today on the back of a trading update and manufacturing site consolidation plans. At the time of writing, Pro-Pac Packaging shares are sitting 8.57% higher for the day at 19 cents per share after being up by as much as 14.29% in early trade.

About Pro-Pac Packaging

Pro-Pac is an international packaging company that operates a distribution and manufacturing network throughout Australia, New Zealand, and Canada.

The company supplies a combination of product and service solutions for primary, secondary, and tertiary packaging for most industry segments. Its vast product range includes flexible films, plastic bottles, gloves, cleaning supplies, and signs.

Pro-Pac was established in 1987 and has been listed on the ASX since 2005.

Why is the Pro-Pac Packaging share price spiking?

This morning, Pro-Pac provided an update on its expected results for the year ending 30 June 2020.

According to the ASX release, trading has been better than expected in the COVID-19 environment. Accordingly, the company expects full-year earnings before interest, tax, depreciation and amortisation (EBITDA) of around $30 million, before significant items. For context, Pro-Pac achieved a $28.1 million EBITDA result in FY19, and a $16.3 million result in the financial year before that.

Additionally, Pro-Pac has continued to target working capital improvements. As a result, it expects its net debt position at 30 June 2020 to be around $60 million. This is down from $82.9 million at 30 June 2019.

Optimisation of manufacturing footprint

In addition to the trading update, Pro-Pac also announced that it will relocate production from its Chester Hill facility in Sydney.

The transition, which is expected to be completed by March 2021, includes the transfer of manufacturing volume from the Chester Hill factory to the company’s other facilities in Sydney, Melbourne, Adelaide and Perth. This is to optimise Pro-Pac’s manufacturing footprint and expand its service offering in an effort to reduce its cost base and grow profitability.

According to the company, central to this initiative is the investment in a new 7-layer extruder and laminator. This piece of equipment will provide new capacity and capability for growth with existing customers, and also support expansion into new markets.

The closure of the Chester Hill facility will involve capital investment of around $7 million and one-off costs of approximately $12.6 million – incurred over the next 2 years. The project will be funded from cash reserves and existing committed banking facilities, and is expected to result in annualised benefits of around $7 million from FY22.

Commenting on today’s update, CEO Tim Welsh said:

Leveraging our existing resources and obtaining the best possible returns on our investments, is an important priority. The consolidation [of facilities] will ensure our Flexibles division remains a leader in the delivery of flexible packaging products and services, for all of the critical markets we serve. The move will also optimise our other sites and enable the business to focus on innovation and growth.

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Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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