Stack it up or pack it up

Financial Mail - Investors Monthly - - Front Page - Stafford Thomas

Just over a year ago a con­fi­dent Nampak CE An­dré de Ruyter told In­vestors Monthly: “We have R2bn to in­vest and will de­ploy it into Africa.”

Cash was burn­ing a hole in Nampak’s pocket fol­low­ing the sale of un­der­per­form­ing South African as­sets for R1.9bn. Then came the oil price col­lapse, sap­ping by far Nampak’s two big­gest African mar­kets, An­gola and Nige­ria, of US dol­lars cru­cial to their abil­ity to fund im­ports and ser­vice for­eign li­a­bil­i­ties.

Dol­lar ra­tioning by An­gola and Nige­ria fol­lowed, leav­ing Nampak sit­ting high and dry, un­able to repa­tri­ate div­i­dends and loan re­pay­ments to SA. To keep the wheels turn­ing at its bev­er­age can op­er­a­tions in An­gola and Nige­ria it has also been forced to fund 40% of pay­ments to for­eign sup­pli­ers.

“The fund­ing is through our Isle of Man fa­cil­ity but it is all on the back of Nampak’s bal­ance sheet,” says the chief fi­nan­cial of­fi­cer since Au­gust 2015, Glen Fuller­ton.

The dam­age has mounted up rapidly. From R750m tied up in cash in An­gola and Nige­ria at the end of Septem­ber 2015, the amount dou­bled to R1.5bn at the end of Nampak’s half-year to March. It amounted to a mas­sive 63% of cash on the bal­ance sheet.

“We were left ex­pe­ri­enc­ing a liq­uid­ity crunch,” con­cedes De Ruyter. It had be­come a des­per­ate sit­u­a­tion call­ing for se­ri­ous ac­tion to be taken.

That started with Nampak’s pass­ing of its in­terim div­i­dend. “Man­age­ment would not be do­ing its job re­spon­si­bly if we had paid a div­i­dend,” says De Ruyter.

Gear­ing lev­els had also got out of hand, ag­gres­sive cap­i­tal spend­ing hav­ing hoisted net debt from a neg­li­gi­ble R16m in 2011 to R7.4bn at the end of Fe­bru­ary. The lat­ter amount rep­re­sented net debt to eq­uity of 74%.

An­other is­sue is US dol­lar debt raised to fund An­golan and Nige­rian op­er­a­tions since 2013. “Gear­ing would go up by R300m if the rand weak­ened by an­other R1 to the dol­lar,” says Fuller­ton.

Tak­ing a bold step to re­duce gear­ing, Nampak has en­tered into an agree­ment to sell and lease back 15 prop­er­ties and sell one out­right to Collins Prop­erty Group in a R1.744bn deal.

“It is one of the big­gest prop­erty deals in a decade,” says De Ruyter. “The lease­back pe­riod is 15 years with an op­tion to ex­tend it for an­other 10 years.”

Set­tle­ment of the deal, which will re­duce gear­ing to about 60%, which is still high, is set for Septem­ber 30.

Nampak’s man­age­ment has also waded in to slash work­ing cap­i­tal. “It is a big fac­tor in de­ter­min­ing ex­ec­u­tives’ in­cen­tives,” says De Ruyter.

Ef­forts bore fruit in the six months to Fe­bru­ary. Year on year, Nampak’s stock level was cut by R169m and trade re­ceiv­ables re­duced by R241m.

“There is more to come,” says Fuller­ton, who also points to a R120m sav­ing on pro­cure­ment costs in the half-year.

Pres­sure on Nampak to as­sist its Nige­rian and An­golan op­er­a­tions to fund im­ports could be abat­ing. From around $6m monthly, sup­port has fallen to about $3m, says Fuller­ton. He says Nige­ria is the big­gest prob­lem be­cause it has kept the naira pegged to the dol­lar.

Were it not for the de­val­u­a­tion of the An­golan kwanza, which cost Nampak a R114m for­eign ex­change loss, the group would have de­liv­ered a fair set of re­sults in the six months to Fe­bru­ary. In­deed, ad­justed for ab­nor­mal items, head­line earn­ings were 21% up.

African op­er­a­tions bounded ahead, lift­ing trad­ing profit R144m (45%) to R462m. Dol­lar de­nom­i­nated prof­its of An­golan and Nige­rian op­er­a­tions were no doubt the key fac­tors. “An­gola and Nige­ria are very profitable,” says De Ruyter.

At face value Nampak also had a bet­ter six months in SA, trad­ing profit lift­ing R91m (24%) to R466m. How­ever, the de­cider was a R114m trad­ing profit swing in its glass di­vi­sion from a R70m loss to a R44m profit. There was also an un­spec­i­fied im­prove­ment in the plas­tics di­vi­sion.

It sug­gests prof­its in the bev­er­age and food can di­vi­sions were un­der pres­sure. Re­flect­ing sub­dued con­sumer de­mand, Bev­can ex­pe­ri­enced a 4% vol­ume fall while DivFood is half-way through a prod­uct ra­tio­nal­i­sa­tion and re­cap­i­tal­i­sa­tion.

De­pressed con­di­tions in SA’s con­sumer mar­ket, a to­tal lack of clar­ity on when hard-cash prof­its will again flow to SA from the key An­golan and Nige­rian op­er­a­tions and high gear­ing make Nampak a high-risk share.

How­ever, the mar­ket has al­ready pun­ished Nampak, ham­mer­ing its share price from a record high of al­most R45 in Novem­ber 2014 to its cur­rent level of around R17. It makes for an in­ter­est­ing share for traders, es­pe­cially those pre­pared to bet on the oil price sus­tain­ing its re­cov­ery.

Tak­ing a bold step to re­duce gear­ing, Nampak has en­tered into an agree­ment to sell and lease back 15 prop­er­ties and sell one out­right

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