African growth, glass turn­around drive re­cov­ery

The pack­ag­ing man­u­fac­turer is fac­ing liq­uid­ity chal­lenges and its bot­tom line has taken a beat­ing due to for­eign ex­change trans­la­tion losses, but it’s not all bad news.

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­week.co.za has been rated as one of the top 5 tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the Re­search Team in the Trea­sury Div

nampak,Africa’s big­gest diver­si­fied pack­ag­ing man­u­fac­turer, has had a tor­rid time, with the share re­turn­ing a neg­a­tive 39% over the past 12 months.

The group has fo­cused on turn­ing around its strug­gling Nampak Glass busi­ness, strength­en­ing its bal­ance sheet (gear­ing peaked at 91% in 2015, fol­low­ing a shop­ping spree be­tween 2011 and 2016 that saw Nampak in­vest R13.5bn in new as­sets), and grow­ing its foot­print on the con­ti­nent.

In the six months to end March, Nampak in­creased its rev­enue by 10% to R9.4bn as it ben­e­fit­ted from im­port re­place­ment due to a weaker rand, new con­trac­tual vol­umes and in­creased bev­er­age con­sump­tion as a re­sult of a hot­terthan-usual sum­mer in South Africa, it said. How­ever, a R144m for­eign ex­change rate trans­la­tion loss damp­ened prof­its, with head­line earn­ings per share ris­ing only 4% from the pre­vi­ous year.

CEO, An­dré de Ruyter, said he was par­tic­u­larly pleased by the turn­around in the glass busi­ness, with the op­er­a­tion de­liv­er­ing a profit of R44m in the pe­riod. The group’s plas­tics busi­ness in­creased trad­ing profit by 20% thanks to higher rev­enues and im­proved cost con­trols, while the pa­per busi­ness grew trad­ing profit by 34%.

It plans to strengthen its bal­ance sheet by the sale and lease­back of 16 South African prop­er­ties worth R1.7bn, a deal that is await­ing ap­proval by the com­pe­ti­tion au­thor­i­ties.

The group did not de­clare an in­terim div­i­dend, say­ing it is fo­cused on con­tain­ing cash – Nampak is fac­ing liq­uid­ity con­straints in An­gola and Nige­ria, where it also has op­er­a­tions – and cut­ting costs. It is tar­get­ing R120m in sav­ings for the fi­nan­cial year from im­prove­ments in pro­cure­ment and sup­ply chain ef­fi­ciency, it said.

De­spite the liq­uid­ity chal­lenges and the im­pact of the for­eign ex­change trans­la­tion losses on Nampak’s bot­tom line, its op­er­a­tions on the rest of the con­ti­nent are a key driver of the group’s per­for­mance. Trad­ing profit from the rest of the con­ti­nent was up 45% yearon-year at R462m, and now con­trib­utes 47% of group trad­ing profit. This is up from 38% in 2015, Nampak said.

De Ruyter also warned on the out­look for the South African con­sumer in­dus­try for the re­main­der of the year, say­ing there are some “tough macroe­co­nomic con­di­tions to con­tend with”.

Al­though it is ex­pect­ing cur­rency liq­uid­ity is­sues in An­gola and Nige­ria to con­tinue, Nampak has as­sured in­vestors that it’s cleared the decks for a muchim­proved per­for­mance for the full year and has re­solved the dif­fi­cul­ties at its glass op­er­a­tion. Based on this, in­vestor sen­ti­ment seems to be warm­ing up as mo­men­tum re­verses up­wards.

What next?

Pos­si­ble sce­nario: Nampak has come off sub­stan­tially from its highs at 4 885c/share. Sup­port at 1 635c/share has jolted Nampak through the re­sis­tance trendline of its long-term bear trend – even con­firm­ing a pos­i­tive above 2 250c/share. Al­though the three-week relative strength in­dex (RSI) seems to limit up­side, the ris­ing bot­toms in­di­cate a po­ten­tial break­through through that trendline. This should open the door to fur­ther gains to­wards the neck­line of a short-term in­verted head-and-shoul­ders pat­tern, which would be con­firmed above 2 600c/share. There­after, a re­cov­ery to 3 270c/share could fol­low in the medium term. Al­ter­na­tive sce­nario: The pre­vi­ous bear trend would be re­sumed be­low 1 805c/share and losses could ex­tend to the 1 635c/share prior low.

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