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Nampak still burdened with debt

Its prospects nonetheless look bright, even though investors remain largely unconvinced.
A worker lifts an aluminium can from the production line at the Nampak Bevcan manufacturing plant in Springs. Image: Waldo Swiegers, Bloomberg

If a picture tells a story, a picture of Nampak’s share price over the last 10 years doesn’t tell a happy tale. Investors have watched as Nampak, once found in most portfolios, fell by more than 90% since 2014 to the current levels of just above R4.00.

The share even dropped another few percent after Nampak announced a big recovery back to profitability in the financial year to September 30, 2021.

It is telling that investors are not queuing up to buy shares even with the new results putting Nampak on a low price-earnings ratio of 6.7 times.

The outlook is not too bad either, according to management.

Read: Fallen giants: How are the turnarounds going?

Nampak CEO Erik Smuts noted in a presentation to shareholders that the company had a successful financial year, driven by the recovery of all the SA metals operations, significant growth in the Nigerian beverage can market, new customers in Zambia, and continued strong demand for its products in Zimbabwe.

A few boxes ticked

“We successfully restructured two divisions, consolidated operations and simplified product offerings to strengthen our profitability and competitiveness. Further, we renegotiated key funding agreements to reduce financial risk and secured a R1 billion non-recourse trade facility to stabilise the balance sheet,” says Smuts.

In addition, Nampak renewed existing export contracts and won a few new export clients to ensure the volume throughput to be able to maintain profitable production levels.

Nampak reported that operating profit before impairment charges recovered to R1.19 billion compared to a loss of R283 million in the 2020 financial year. Furthermore, in 2020, the results were also hit by an impairment of more than R4 billion.

The net result is that earnings recovered from a loss of R3.98 billion in 2020 to a profit of R377 million.

Headline earnings per share amounted to 62.3 cents against a loss of 87.7 cents in the previous year.

Management also points out that cash flow improved significantly with cash generated before working capital changes increasing by 133% to R1.7 billion, due to increased volumes and significantly improved profitability. The overall profit margin increased from around 6% to 10%.

Cash generated after working capital changes was stable at R1.1 billion, despite an additional investment in working capital to fund growth.

Outlook

Smuts says management expects improved demand in all areas of the business in the new financial year.

“All our operations should benefit from the easing of pandemic restrictions,” he says, specifically mentioning the alcohol ban during previous lockdowns and restrictions on public events.

“Bevcan SA’s improved demand is expected to continue if restrictions on large events are further eased. The renewal of various local long-term supply contracts during the past 12 months will secure beverage can volumes for the coming two years, while the new export contract will support can ends volumes for 2022,” according to the commentary to the results.

Demand for products produced by the paper and plastics divisions should also improve as consumption of milk, juice and traditional beer products increases, while operating costs have been reduced.

Smuts also indicated that African markets can show improvement or, at least, maintain current levels of activity.

Which raises the question of why investors are not giving Nampak recognition for the good results and the potential for continued improvement.

Read:

The figures provide a few pointers: Nampak is still struggling with a lot of debt, and it seems overly reliant on African countries.

Debt

It reduced its long term debt by R1.3 billion (R4.47 billion compared to R5.76 billion a year ago), but short term liabilities increased from R3.9 billion to more than R4.7 billion. Total liabilities reduced by (only) R600 million, but is still high at nearly R11.4 billion compared to its total balance sheet value of less than R16 billion.

The good news is that a large proportion of dollar-denominated debt has been replaced by debt in local currency.

At the end of the 2020 financial year, 65% of Nampak’s total debt was dollar based – reducing to only 41% at the end of the recent financial year.

Also, while business in African countries seems very profitable, the big reliance on Africa might scare away more risk-adverse investors.

Nampak reported revenue of approximately R9.4 billion in SA, trading profit of R597 million and a trading margin of 6.4%. Operations in the rest of Africa achieved an operating margin of 21%, delivering R968 million in profit on revenue of R4.58 billion.

There are risks associated with this imbalance, such as actually getting the cash out of Africa, volatile exchange rates, and the risk of high inflation.

Foreign currency shortages in Zimbabwe remain a problem, with Nampak reporting that these operations defaulted on repayments of old debt.

A note to the results refers to “pleasing cash transfers” from the rest of Africa.

Nampak was able to remit R1.6 billion during the year to end September 2021, compared to R2.36 billion in the prior year. It included a total of R78 million from Zimbabwe, R57 million of which was part of contractual debt repayments.

The share dropped 8.5% to close at R4 on Monday, valuing the whole group at only R2.76 billion.

The share price is much lower than the net asset value, which is R7.48 per share, according to the financial statements.

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