Nampak’s future in the balance

Nampak released its results for the full year ending 30 September 2022, showing strong revenue growth but disappointing earnings.

Nampak specialises in packaging and generates the bulk of its revenue from metal packaging like aluminium cans.

It also manufactures plastic and paper packaging and operates mainly in South Africa and the rest of Africa.

The company recorded a strong 21% increase in its revenue from R13.96 billion in 2021 to R16.94 billion in 2022.

CEO Erik Smuts was not celebrating during Nampak’s results webinar despite the significant revenue growth.

He said the increase in revenue was largely caused by extensive input price increases carried through to the consumer, referring specifically to the price of aluminium.

These increases had to be recovered in some way and, therefore, negatively affected the company’s expenses.

Although its revenue had strong growth, Nampak recorded a significant decrease in its profit for the year, which fell from R377.4 million in 2021 to a loss of R25.7 million in 2022.

Besides the large increases in input prices, Nampak’s earnings have been negatively affected by two additional events.

• Due to USD shortages in Nigeria, Nampak wasn’t able to convert Nigerian Naira at the official exchange rates, which led to significant foreign exchange losses to the tune of R546 million.
• Large increases in impairment losses due to higher discount rates used in the asset’s valuations. These applied to DivFood South Africa, Rigid Plastic, Bevcan Angola, and Metals Nigeria.

The disappointing results, although important, were not the main focus of Nampak’s results release. Instead, it was details regarding the company’s plan to refinance its debt.

On 1 December, Nampak announced that it would need to raise at least R1.35 billion to finance debt maturing on 1 April 2023 and 25 September 2023 via a rights issue.

The market did not take kindly to this news, and the share price fell 37% on the day.

During the results presentation, Smuts explained the circumstances that led to the necessity of debt refinancing.

He said the current management team is like a son that needs to pay for the sins of his father, suggesting that prior management has made poor decisions.

Smuts specifically pointed to the company’s decision to buy a third glass furnace in 2014 for just below R1 billion.

This investment followed the acquisition of its glass packaging division in 2011 for R938 million, which means it invested at least R2 billion into this project.

It was a poor investment, and eight years later, after pumping lots of money into it, Nampak sold the entire division for R1.5 billion.

The company’s glass division struggled, burned cash, and needed to be impaired on many occasions, Smuts said.

He added that Nampak significantly overpaid in its acquisition of Bevcan Nigeria at $301 million, which also experienced significant impairment losses and is worth much less today.

These poor acquisitions and subsequent investments resulted in a big increase in debt, which peaked at R12.2 billion in 2018.

Another way to analyse the debt is by looking at Nampak’s interest coverage ratio – the number of times it can cover its interest payments on the debt with its operating profit.

The interest on Nampak’s debt has increased relative to the company’s operating profit from 2013 to 2020.

From 2018 to 2020, Nampak could not fully cover its interest payments with its operating profit.

There has been a slight improvement in the company’s debt position in 2021 and 2022, but still far from the level it was in 2013.

The Nampak management team has made poor operating choices in the past decade, illustrated by its revenue.

The expansion into Africa was not successful, and over the recent few years, its exposure to these regions has deteriorated.

Since 2021, Nampak has increased revenue. In the 2022 financial year, it was able to recover to pre-Covid levels.

The rights offer could potentially raise R2 billion, and Smuts said they believe this would be sufficient to deleverage the firm to a healthy level.

The outcome of the rights issue remains to be seen, and if it is successful, it will hopefully be a true turnaround story.