Can Nampak avoid a rights issue?
The answer seems to be no ironically, this is because, not in spite of, a recent surge in its operational performance
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● No doubt there are times when Nampak’s management thinks back longingly to the days when it was part of the powerful Barloworld conglomerate.
Back then, in the 1990s, it was tucked into a cash-rich group that could dish out whatever funds were needed to buy businesses or advance organic growth opportunities.
Now, it almost doesn’t matter that the country’s once near-dominant packaging company was able to report an exceptionally strong operational performance in the five months to end-February; the most important thing in Nampak’s life in 2022 is to persuade its funders on June 30 that it will be able to knock R1bn off its debt by September 30. That’s what Nampak’s funding agreement requires. All things considered, it’s an extremely tough ask.
And judging by its recent share price slump — from R4.17 to R3.01, following management’s recent pre-close conference call — investors have decided that, whatever management might say, it can’t be done without a rights issue.
CEO Erik Smuts tells analysts the board wants to avoid a rights issue if at all possible. But he makes no effort to play down just how tough the debt situation is. “The key focus areas for management remain covenant compliance and the assessment of the sustainability of our long-term debt and capital structures,” he says.
Because of the challenges that have reared up in the face of most manufacturing businesses — commodity price hikes and supply chain disruptions — there’s no hope of Nampak trading its way out of the vice-like grip of its funding agreements. Far from it. As Cobus Cilliers, senior equity analyst at All Weather Capital, points out: “In the five months to end-February it did phenomenally well from an income statement perspective but it has actually traded itself into more problems.”
For example, Nampak’s revenue, groupwide, was more than 20% higher for the five months. Cilliers says the group was recovering quite nicely and getting its hefty debt burden under control, but unprecedented increases in steel and aluminium resulted in working capital rocketing during the five-month review period. And because of threats of supply chain disruptions the group was forced to build up more stock than usual. This meant using up even more precious cash resources. “[Nampak] is in a really unfortunate situation and a lot of it is outside its control,” says Cilliers.
The sad reality for Nampak is that subsidiary Bevcan’s exceptional performance, thanks to strong demand for energy drinks, beer and cider, has aggravated the pressure on its balance sheet. The strong performances were notched up not just in SA but also in Nigeria and Angola. “Bevcan Nigeria continued to perform very well and was a major contributor to improved group results for the period,” says the company.
Cilliers says the Nigerian business is a particularly attractive one, with much higher margins than achieved locally, “but they’re struggling to repatriate cash. Similarly, Angola is doing well, but cash repatriation is a problem.”
Smuts says that in the current cycle, aluminium has shot up from $1,800/t to a high of $4,000/t. It has eased back but remains well in excess of $3,000/t. “The steel price has also increased, by 60%70%,” says Smuts.
The good news is that Smuts is of the opinion that these price surges will unwind; the bad news is that he doesn’t think the unwinding will happen in the short term. “We have to ready ourselves to cope with these very high prices for at least a year,” he says.
In the absence of a wealthy holding company, part of that coping includes asset sales, establishing trading partnerships and selling chunks of the debtors’ book.
But there’s not much encouraging news on any of those fronts. Nampak seems to have accessed as much of its debtors’ book as it can; efforts to sell a number of its bigger businesses have all been unsuccessful. A possible sale of part of the group’s liquid paper business had to be cancelled because of licensing issues.
As for other potential sales that seemed to be in the bag, “The buyers walked away either right at the end [of the process] or couldn’t secure the funding to go through with the transaction,” says Smuts. Regarding partnerships, Smuts says that despite many discussions, “nothing has happened”.
Zaid Paruk, portfolio manager and analyst at Aeon Investment Management, says that given the company’s 130% gearing ratio it’s difficult to see how a rights issue can be avoided. With steep commodity prices and no near-term prospect of asset disposals, which Paruk says would take considerable time from start to completion given various regulatory approvals, it’s difficult to see how the group will cope with its balance sheet pressure. Paruk also plays down prospects for the sale of properties, because of their unique character.
From a distance Nampak looks like a very attractive business, but troubling issues become evident on closer inspection, he says.
“It’s the major player in SA, Zimbabwe, Nigeria and Angola; indeed, in some of those markets it’s the only player that provides a reliable service.” But, as Paruk explains, this comes with some significant drawbacks.
“Sixty percent of its earnings come from outside SA. That means it’s a play on unpredictable and volatile African currencies with associated forex and cash repatriation risk,” he says.
And while it has secured long-term contracts with its customers, Nampak has not been able to get the same from its suppliers, which is why it is now caught in such a tight pricing squeeze.
Without its old cash-rich parent, it’s hard to disagree with the market’s apparent assumption that a rights issue is unavoidable.