Wednesday, January 19

Nampak still burdened with debt


If a picture tells a story, a picture of Nampak’s stock price over the past 10 years doesn’t tell a happy story. Investors have watched Nampak, once it was in most portfolios, fell more than 90% from 2014 to current levels of just over R4.00.

The share even fell another small percentage after Nampak announced a big recovery in profitability in the financial year to September 30, 2021.

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It is telling that investors are not lining up to buy stocks, even with the new results that put Nampak at a low price-to-earnings ratio of 6.7 times.

The outlook isn’t that bad, either, according to management.

Read: Fallen Giants: How are the changes going?

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

Some checked boxes

“We successfully restructured two divisions, consolidated operations and simplified the product offering to strengthen our profitability and competitiveness. In addition, we renegotiated key financing arrangements to reduce financial risk and secured a R 1 billion non-recourse trading facility to stabilize the balance sheet, ”says Smuts.

In addition, Nampak renewed existing export contracts and won some new export clients to ensure volume performance in order 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 financial year 2020. Furthermore, in 2020, results were also affected by an impairment of more than 4 billion rand.

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

Overall earnings per share amounted to 62.3 cents versus a loss of 87.7 cents the prior year.

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

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

panorama

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

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

“The improved demand for Bevcan SA is expected to continue if restrictions on large events are further eased. The renewal of several local long-term supply contracts during the last 12 months will ensure the volumes of beverage cans for the next two years, while the new export contract will support the final volumes of cans by 2022 ”, according to the comment 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 decline.

Smuts also noted that African markets may show improvement or at least maintain current levels of activity.

Which begs the question why investors are not recognizing Nampak’s strong performance and potential for continuous improvement.

Read:

The ‘relative value’ manager who still sees considerable advantage in the JSE
How SA’s Second Best Performing Fund Over a Year Achieved a 93% Return

The figures provide some indication: Nampak is still struggling with a large amount of debt and appears to be 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 fell (only) by R600 million, but is still high at almost R11.4 billion compared to the total balance sheet value of less than R16.0 billion.

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

At the end of the 2020 financial year, 65% of Nampak’s total debt was dollar-based, which was down to just 41% at the end of the recent financial year.

Furthermore, while business in African countries appears highly profitable, the heavy dependence on Africa could scare off more risk-averse investors.

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

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

The shortage of foreign exchange in Zimbabwe remains a problem, and Nampak reported that these operations did not meet the previous debt payments.

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 until the end of September 2021, compared to R2.36 billion the previous year. It included a total of R78 million from Zimbabwe, of which R57 million was part of the contractual debt repayments.

The stock fell 8.5% to close at R4 on Monday, valuing the entire group at just 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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