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.
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.
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.