TRADE of the MONTH

BowMet looks solid af­ter oper­a­tional re­struc­tur­ing

Financial Mail - Investors Monthly - - Opening Bell - Stafford Thomas

From a size per­spec­tive rigid plas­tics pack­ag­ing group Bowler Met­calf (BowMet), weigh­ing in with a mar­ket cap of only R753m, is no match for R12.3bn mar­ket-cap in­dus­try gi­ant Nam­pak. But it’s a dif­fer­ent story when it comes to in­vest­ment mer­its, with BowMet heav­ily out­weigh­ing Nam­pak as the share to back.

The two groups’ chair­men’s re­ports to share­hold­ers in 2016 are telling.

BowMet chair­man Brian Frost de­liv­ered a mes­sage that could only have brought smiles to the group’s share­hold­ers: “The for­ward or­der book is very sat­is­fac­tory and will keep all fac­to­ries at full stretch . . . It has also re­quired an ur­gent ex­pan­sion of our Jo­han­nes­burg man­u­fac­tur­ing fa­cil­i­ties.”

It was a mes­sage Nam­pak share­hold­ers would have liked to re­ceive. In­stead, chair­man Tito Mboweni lamented over a “range of ex­ter­nal fac­tors” that had “im­pacted the per­for­mance of Nam­pak’s busi­nesses”.

The dam­age was enough to send Nam­pak’s head­line EPS tum­bling 41% in its year to Septem­ber.

“Nam­pak has is­sues which will take a long time to sort out,” says War­ren Jervis, man­ager of the Old Mu­tual Mid & Small-Cap Fund.

Not least of these are its bev­er­age can op­er­a­tions in An­gola and Nige­ria. “They pro­duce 45% of Nam­pak’s Ebitda [earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion],” notes Jervis.

Nam­pak was dealt a blow by the oil price col­lapse, which left An­gola and Nige­ria des­per­ately short of US dol­lars. It found it­self sit­ting high and dry, un­able to repa­tri­ate div­i­dends and loan re­pay­ments to SA.

To keep the wheels turn­ing at its An­golan and Nige­rian op­er­a­tions, Nam­pak was forced to fund up to 40% of pay­ments to for­eign sup­pli­ers through its Isle of Man fa­cil­ity. It left Nam­pak fac­ing an in­creas­ingly se­ri­ous cash crunch.

The group scram­bled for cash, pass­ing its fi­nal 2016 div­i­dend and en­ter­ing into an agree­ment to lease back 15 prop­er­ties and sell one out­right to Collins Prop­erty Group in a R1.744bn deal closed on Septem­ber 30.

The deal bol­stered cash on Nam­pak’s bal­ance sheet to R2.8bn and en­abled it to re­duce its net debt-to-eq­uity bur­den from 74% to 51%.

But, of con­cern, R2bn (71%) of Nam­pak’s cash at its yearend was tied up in An­gola and Nige­ria. This was up from R1.5bn six months ear­lier and R700m 12 months ear­lier.

By com­par­i­son, BowMet’s bal­ance sheet is a pic­ture of con­ser­vatism. At its June yearend it had R158m cash on its debt-free bal­ance sheet.

BowMet is emerg­ing from an ex­tended pe­riod of oper­a­tional re­struc­tur­ing that, in the past fi­nan­cial year, in­cluded heavy capex on tech­nolo­gies to ex­e­cute new con­tracts.

Bed­ding down new projects will put strain on man­u­fac­tur­ing op­er­a­tions in the year to June 2017, cau­tions BowMet CEO Paul Sass in the com­pany’s an­nual re­port. The re­wards, he says, will start flow­ing in the 2018 fi­nan­cial year when economies of scale and in­creas­ing oper­a­tional ef­fi­ciency be­gin kick­ing in.

There is an­other as­pect to BowMet that makes it an in­vest­ment with big po­ten­tial. This is its in­volve­ment in the soft-drink sec­tor through a 43% stake in SoftBev, which in­cludes Jive, Coo-ee, CapriSun, Re­boost and, since July 2015, Pepsi in its brand line-up.

BowMet is no stranger to the soft-drink sec­tor, hav­ing built Qual­ity Bev­er­ages (QB), a suc­cess­ful busi­ness in the West­ern Cape. But QB’s move into the Gaut­eng mar­ket was far from a suc­cess.

A so­lu­tion pre­sented it­self in 2015 when BowMet and KwaZulu Na­tal-based soft-drink firm Shore­line Sales agreed to a merger of their in­ter­ests to form SoftBev, a com­pany with a na­tional reach and an­nual sales of more than R1bn. BowMet re­ceived SoftBev shares in ex­change for QB.

SoftBev was still far from run­ning op­ti­mally in BowMet’s past fi­nan­cial year. Prob­lems in­cluded de­lays in im­ple­ment­ing the Pepsi in­te­gra­tion, pro­duc­tion set­backs in the West­ern Cape and late de­liv­ery of a vi­tal com­po­nent needed to com­plete a new R80m bot­tling line at the Gaut­eng plant.

But SoftBev did turn a profit: R21.4m af­ter tax. Its po­ten­tial is higher. At its best, QB was pro­duc­ing a net profit of R15m on sales of no more than a quar­ter of SoftBev’s.

SoftBev has at­tracted the in­ter­est of value in­vestor John Bic­card, who re­cently built a mod­est hold­ing in BowMet in the In­vestec Value Fund he man­ages. “You are not pay­ing for the bev­er­age busi­ness in BowMet’s price,” he says.

Vanessa van Vu­uren, man­ager of the San­lam Small Cap Fund, agrees: “The bev­er­age busi­ness is not priced in.”

It cer­tainly looks that way. QB was valued at R274m at the time of the merger, while BowMet’s stake in SoftBev is now valued at R280m on its bal­ance sheet. This equates to 37% of BowMet’s mar­ket cap.

Bic­card and Van Vu­uren be­lieve SoftBev is des­tined for a JSE listing. This would set the scene for BowMet to un­bun­dle its stake to its share­hold­ers.

It rep­re­sents an en­tic­ing medium- to longer-term pos­si­bil­ity. In the short term the big en­tice­ment lies in BowMet’s mod­est 9.5 p:e, a handy 3.7% div­i­dend yield and a share price trad­ing on par with its net as­set value.

Nam­pak was dealt a blow by the oil price col­lapse, which left An­gola and Nige­ria short of US dol­lars

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