Stack it up or pack it up
Just over a year ago a confident Nampak CE André de Ruyter told Investors Monthly: “We have R2bn to invest and will deploy it into Africa.”
Cash was burning a hole in Nampak’s pocket following the sale of underperforming South African assets for R1.9bn. Then came the oil price collapse, sapping by far Nampak’s two biggest African markets, Angola and Nigeria, of US dollars crucial to their ability to fund imports and service foreign liabilities.
Dollar rationing by Angola and Nigeria followed, leaving Nampak sitting high and dry, unable to repatriate dividends and loan repayments to SA. To keep the wheels turning at its beverage can operations in Angola and Nigeria it has also been forced to fund 40% of payments to foreign suppliers.
“The funding is through our Isle of Man facility but it is all on the back of Nampak’s balance sheet,” says the chief financial officer since August 2015, Glen Fullerton.
The damage has mounted up rapidly. From R750m tied up in cash in Angola and Nigeria at the end of September 2015, the amount doubled to R1.5bn at the end of Nampak’s half-year to March. It amounted to a massive 63% of cash on the balance sheet.
“We were left experiencing a liquidity crunch,” concedes De Ruyter. It had become a desperate situation calling for serious action to be taken.
That started with Nampak’s passing of its interim dividend. “Management would not be doing its job responsibly if we had paid a dividend,” says De Ruyter.
Gearing levels had also got out of hand, aggressive capital spending having hoisted net debt from a negligible R16m in 2011 to R7.4bn at the end of February. The latter amount represented net debt to equity of 74%.
Another issue is US dollar debt raised to fund Angolan and Nigerian operations since 2013. “Gearing would go up by R300m if the rand weakened by another R1 to the dollar,” says Fullerton.
Taking a bold step to reduce gearing, Nampak has entered into an agreement to sell and lease back 15 properties and sell one outright to Collins Property Group in a R1.744bn deal.
“It is one of the biggest property deals in a decade,” says De Ruyter. “The leaseback period is 15 years with an option to extend it for another 10 years.”
Settlement of the deal, which will reduce gearing to about 60%, which is still high, is set for September 30.
Nampak’s management has also waded in to slash working capital. “It is a big factor in determining executives’ incentives,” says De Ruyter.
Efforts bore fruit in the six months to February. Year on year, Nampak’s stock level was cut by R169m and trade receivables reduced by R241m.
“There is more to come,” says Fullerton, who also points to a R120m saving on procurement costs in the half-year.
Pressure on Nampak to assist its Nigerian and Angolan operations to fund imports could be abating. From around $6m monthly, support has fallen to about $3m, says Fullerton. He says Nigeria is the biggest problem because it has kept the naira pegged to the dollar.
Were it not for the devaluation of the Angolan kwanza, which cost Nampak a R114m foreign exchange loss, the group would have delivered a fair set of results in the six months to February. Indeed, adjusted for abnormal items, headline earnings were 21% up.
African operations bounded ahead, lifting trading profit R144m (45%) to R462m. Dollar denominated profits of Angolan and Nigerian operations were no doubt the key factors. “Angola and Nigeria are very profitable,” says De Ruyter.
At face value Nampak also had a better six months in SA, trading profit lifting R91m (24%) to R466m. However, the decider was a R114m trading profit swing in its glass division from a R70m loss to a R44m profit. There was also an unspecified improvement in the plastics division.
It suggests profits in the beverage and food can divisions were under pressure. Reflecting subdued consumer demand, Bevcan experienced a 4% volume fall while DivFood is half-way through a product rationalisation and recapitalisation.
Depressed conditions in SA’s consumer market, a total lack of clarity on when hard-cash profits will again flow to SA from the key Angolan and Nigerian operations and high gearing make Nampak a high-risk share.
However, the market has already punished Nampak, hammering its share price from a record high of almost R45 in November 2014 to its current level of around R17. It makes for an interesting share for traders, especially those prepared to bet on the oil price sustaining its recovery.
Taking a bold step to reduce gearing, Nampak has entered into an agreement to sell and lease back 15 properties and sell one outright