TRADE of the MONTH

BowMet looks solid after operational restructuring

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