Nampak writes down R3bn

• Packaging group writes down businesses in Angola and Nigeria by R3bn amid oil price slump and Covid-19 crisis

Africa’s largest packaging company, Nampak, has halted its strategy of seeking growth in the rest of Africa due to Covid-19 and the oil-price collapse hitting its operations in Angola and Nigeria. The group is cutting staff, considering disposal of assets and will require operations in African markets to pay their own way after writing down its businesses by an amount that is almost four times its market capitalisation in its year to end-March.

Africa’s largest packaging company Nampak has halted its strategy of seeking growth in the rest of Africa after Covid-19 and an oil price collapse hit its operations in Angola and Nigeria.

The group is cutting staff, mulling asset disposals and will require operations in African markets to pay their own way, after writing down its businesses by an amount that is almost four times its market capitalisation in its year to endMarch.

Nampak wrote down businesses in Angola and Nigeria by R3bn, which compares unfavourably with its market capitalisation of about R770m, saying on Friday that profits were also at risk from SA’s ban of alcohol sales under the pandemic lockdown.

The group swung into a loss of about R2.4bn in its six months to end-March, from profit of R653.3m previously. Nampak revenue fell 17% to R6.5bn, with the group already facing tough operating conditions, including in SA where festive season sales were lower than expected.

Covid-19 and a depressed oil price have battered the outlook for its operations in Angola and Nigeria in particular, with CEO Erik Smuts saying the company wanted to simplify its business as much as possible.

“Nampak is a good company in a bad place. I think most of us got caught off guard about the strength of the economy at the end of last year. It’s a lot worse than we thought. But the nice thing is that the fault lines are showing themselves clearly. We can now fix the problems with Nampak,” he said.

The group was not giving up on the rest of Africa, he said, but had rethought its strategy of accelerating investment in the continent. Nampak was not in a rush to sell any of its operations at bargain prices but it would cut certain product lines where it was overinvested.

“We are very well capitalised in Africa as it is, but we are overinvested in certain markets. We will remain in beverage-cans production in Angola and Nigeria but will cut in other areas. There is no immediate need to sell any businesses at any cost,” Smuts said.

Part of the simplification over the long term would include disposing of businesses that, in some markets, saw Nampak competing with itself.

Ron Klipin of Cratos Asset Management said Nampak was facing a challenging period ahead. “They are unlikely to find a buyer for these businesses unless they are giving them away at knock-down prices.”

The outlook in Nigeria and Angola was gloomy, and given the oil price collapse, it was possible these countries could feel the effect of foreign-exchange shortages, which would weaken their currencies.

Oil exports are significant to Nigeria and Angola, and the price of Brent crude has almost halved so far in 2020, hit by a production dispute between Saudi Arabia and Russia, and the effect of Covid-19 on travel.

“In order to protect the group’s balance sheet and in the light of anticipated foreign currency shortages resulting from the lower oil price, raw materials will only be supplied to both Angola and Nigeria to the extent that these businesses can obtain the required foreign exchange to fund the” the importation group said. of raw materials,

It was not going to allow Nigeria to lead to a rise in debt levels, and would restrict trading rather than put a strain on the group’s balance sheet.

Nampak has implemented salary cuts for management, and is already reducing staff. Smuts said executives had taken 30% cuts for three months and junior managers 15%. No dividend was declared for the period.

The last time Nampak paid a dividend was in November 2015 at the end of the 2015 financial year. The group’s share price gained 2.68% to close at R1.15.

Opportune Investments chief investment officer Chris Logan said Nampak was an example of terrible capital allocation. The market cap of R742m has lost 97% of its value since its yearend five years ago, he said.

“This truly appalling destruction of value has nothing to do with the sector as demonstrated by the exemplary performance of Ball Corp, the largest beverage can maker in the world, and everything to do with Nampak’s executive incentives, which are woefully misaligned with shareholder value,” he said.

“This has shown up in an extraordinary misallocation of capital at Nampak amounting to R12.665bn since 2010, 17 times market cap; impairments of R6.569bn since 2010, nine times market cap; and forex losses of R2.717bn, 3.7 times market cap, since 2015,” he said.

Ball Corp, with a market cap of R409bn, 551 times Nampak’s market cap, adopted economic value-added incentive compensation in 1992, he said.

“This leads to great capital allocation and disciplines and a share price which has increased two hundredfold since then, but 28 years later we still have Nampak arguing why they know better,” he said.

THEY ARE UNLIKELY TO FIND A BUYER FOR THESE BUSINESSES UNLESS THEY ARE GIVING THEM AWAY AT KNOCK-DOWN PRICES