This article was first published in the latest issue of Moneyweb Investor. To read the magazine click here.
It may be all about packaging for the Nampak group, but it’s the curate’s egg inside that is troubling investors.
On the one hand, two years of restructuring and reorganisation appear to be paying off. On the other, the increasing importance of its operations in the rest of Africa, and specifically the ensuing problems getting money out of Angola and Nigeria, have caused some investor jitters.
In its most recent (March 16) update, Nampak management went some way to provide investors with clarity on the situation in the rest of Africa. Analysts remain concerned, however, that it is left with a dichotomy: It has successfully diversified its business which was traditionally a little too connected with growth in the South African economy, which is currently static at best. Its 28 operations in South Africa contribute 40% of trading profit; its 15 operations in the rest of Africa now contribute 49%, and the six UK operations contribute 6%.
Yet its diversification, which has been successful operationally, has brought in additional risk, specifically around liquidity in some countries in which it operates. Thus expansionary plans, specifically in Angola and Nigeria, will be viewed with some caution.
Nampak has done much over the past two years to pave the way for future growth. It sold low margin businesses, embarked on a capital expansion programme, invested in energy efficiency, improved focus on operational excellence, reduced costs and improved its procurement processes. While not complete, this process has put Nampak in a stronger position, its executives said in its update.
The concerns about Nampak, however, are largely around the R1.5 billion balance it now has in Nigeria and Angola, which has increased from R700 million in September 2015.
Nampak says its sales volumes in the rest of Africa are good and the businesses are profitable. Trading margins are attractive even after adjusting for forex impact, it said, and margins are protected in that the majority of monthly pricing is based on the previous month’s average dollar/local currency exchange rate.The liquidity problem is more evident in Angola than in Nigeria, and Nampak is looking at hedging options.
It has secured raw material supply to operations through its offshore buying and treasury office on the Isle of Man – an advantage when a lack of US dollar liquidity has placed pressure on other manufacturers’ cash flows. It has also managed down its purchases to reduce its funding requirement.
In his 2015 annual report, chief executive André de Ruyter said there was room to leverage Nampak’s existing businesses on the continent and improve their efficiencies, “while partnering with major multinational customers and thereby mitigating some of the payment risks associated with doing business in Africa.”
Nampak is getting about 60% liquidity based on invoices presented to in-country commercial banks for payment.
The increase in cash balances in Nigeria and Angola reflects the translation of the balances to the rand at a weaker exchange rate, profit generated and the liquidity shortfall.
Avior Capital Markets analyst Mark Hodgson said management had done reasonably well in South Africa in rationalising the businesses they are focusing on. The group has a more even earnings balance between South Africa and the rest of Africa. “In terms of the rest of Africa, there are specific challenging macro factors impacting on cash flow and group debt covenants which are concerning investors.”
Another analyst, who asked not to be named, said operationally, its businesses in the rest of Africa were fine. But the issue of repatriating cash is the biggest concern. He said Nampak is considering expansion in Nigeria and Ethiopia, and going ahead in Nigeria could be risky.
Nampak did assure investors it “will be circumspect regarding further capital investment in the rest of Africa.” It has already delayed investment into a third beverage can line and glass furnace in Angola. Glass opportunities in Nigeria and Ethiopia are being evaluated.
In its update, Nampak said canning business Bevcan’s full-year volume growth is still expected to exceed GDP growth.
While the Angolan economy has slowed, a supply agreement struck with Angola’s biggest importer Refriango, late last year – to supply it with more than half of its requirements will boost volumes. Bevcan Nigeria’s market share is growing.
Nampak is talking to key customers in Angola and Nigeria to help it import major raw material items and components.
In South Africa, DivFood’s higher volumes were moderated by some margin decline. Cost savings, product diversification and operational improvements in South Africa and the UK boosted its plastics division. High temperatures in South Africa boosted demand for juice and water.
In the paper division, Nigeria Cartons performed well due to increased sales volumes, and this should continue, as restrictions on imported products encourage local sourcing of packaged goods. Zambia, Kenya, Malawi and Zimbabwe performances were mixed.
The glass division has resolved its issues of the previous year.
On March 1 a R2 billion note programme was established and Nampak will, in due course, give an update on other balance sheet- strengthening opportunities. Various projects have yielded positive results: The Buy Better programme to improve procurement will deliver savings of R120 million in 2016. More non-core assets will be sold to reduce debt.
The ten-year funding provided to the Nampak Black Management Trust matured on December 31 and it sold shares, resulting in an inflow of R386 million to Nampak, which was used to reduce debt.
Nampak has revised capital expenditure down to R0.8 – R1.1billion from R1.2 – R1.6 billion previously.
Overall, Nampak has relatively bullish expectations for the rest of the year, although the liquidity issues in Nigeria and Angola will have foreign currency translation effects.
Investor relations manager Zanele Salman, said Nampak is in a closed period and further details will only be given when it releases results on June 1.
De Ruyter said Nampak has remained focused on its two broad strategic objectives: “to unlock further value from our base business, and to accelerate growth in the rest of Africa.”
While it has made significant progress, it will need to show investors that the two prongs of its strategy can work hand in hand. At the moment, analyst consensus is to hold the share. But the success or lack of it in either one of the two prongs may swing sentiment either way.