The Nampak opportunity
PIGGY has noted that the local packaging industry is being adversely impacted by several factors.
ese include;
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Foreign currency constraints that also increase the price of raw materials;
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Higher electricity costs; higher wages; and
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e inability to roll over all these costs to customers.
Two reasons for not being able to roll over these costs include;
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A flat consumer expenditure market and Stiff competition. Another stumbling block for local packaging companies is that they do not have the high production runs like some of their international counterparts to achieve the necessary critical mass.
As such, those companies that can best overcome this obstacle are those that have (i) a specialised niche where they are able to achieve above average levels of growth; (ii) a technology edge without compromising their return on assets; (iii) kept their cost base under control; and (iv) generated high levels of free cash flow.
One such company that is well positioned in terms of surfing the economic tides in Zimbabwe is Nampak.
Nampak Zimbabwe Limited is engaged in a diverse range of plastic products, which includes crates, drums, tanks, bottles and closures. e business supplies numerous leading local brands and exports to Southern African Development Community (Sadc) and Common Market for Eastern and Southern Africa (Comesa) countries, such as Mozambique, Zambia and Malawi.
In its FY2021 results, the packaging company recorded a 202% revenue growth compared to the prior year to ZW$8,1 billion (US$62,2 million at this week’s official rate of US$1:ZW$130,1) driven by an increase in sales volumes across all business segments.
In the printing and converting segment, Hunyani Paper and Packaging saw a 23% sales volume growth underpinned by increased demand in the commercial sector.
In the same vein, under the plastics and metals segment, Megapak and CarnaudMetalbox recorded a 68% and 31% volumes growth, respectively.
e overall profit position for the group increased by 102% to ZW$1, 6 billion (US$13 million). An important observation is that Nampak also offers exposure to the tobacco industry.
According to the Tobacco Industry and Marketing Board (TIMB), a delay in rainfall and supposed shift in seasons resulted in a delay in tobacco planting.
e delayed rainfall patterns may interfere with the crop’s drying season thereby affecting crop quality and ultimately the group’s paper and packaging division.
However, Nampak stands to derive value at multiple stages along the value chain process (lamina and cut rag packaging) through the recently announced incremental export retention for tobacco merchants.
Delta’s strong production volumes will also sustain the business’ margins in the plastics and metal segment.
Piggy also notes that the investment thesis in Nampak lies in the strong strategic shareholders (Nampak South Africa 48,6% and Delta Corporation 21,4%).
Piggy thinks the stock must be added to core portfolios given that it is trading at undemanding multiples (Price of ZW$12,50 (US$0,096) and Fwd PER of 5.3x). e tight scrip also limits downside risk. Get more tidbits on the stock market by joining a PiggyBankAdvisor WhatsApp Group (+263 78 358 4745).
Matsika is the head of research at Morgan & Co and founder of piggybankadvisor.com. — batanai@ morganzim.com / batanai@piggybankadvisor. com or mobile: +263 783 584 745.