Nampak: When oil blocks the cash flow
Nampak is overcoming the difficulty it faced after it could not repatriate funds from two profitable African countries
When André de Ruyter departed from Sasol in 2013 to become Nampak CEO he left a company heavily dependent on the oil price.
But not much is different for him now.
The oil price became very much a part of his life again in 2015, when it went into free fall. This left Nampak’s two biggest African markets by far, Angola and Nigeria, chronically short of US dollars, which are crucial to their ability to fund imports and service foreign liabilities.
The two African countries imposed draconian dollar rationing, leaving Nampak unable to repatriate dividends and loan repayments to SA.
To keep the wheels turning at its Angolan and Nigerian beverage can plants, Nampak was also forced to fund a big chunk of payments to foreign suppliers through its Isle of Man debt facility.
This threw Nampak into a liquidity crisis, forcing it to pass its dividend in 2016, the first time ever. In its scramble for cash Nampak entered into a R1.744bn deal in September 2016 to lease back 15 properties for up to 25 years and sell one outright.
"We can now fund imports virtually indefinitely and will certainly not need a rights issue," says De Ruyter.
Despite their oil price woes, Angola and Nigeria remain hugely profitable for Nampak — so much so that in the group’s six months to March African operations, led by Angola, delivered a 32% rise in trading profit to R600m.
"Our Angolan business did exceptionally well in terms of volumes and margins," says De Ruyter.
It also powered African operations into the lead, with their trading
profit coming in R110m ahead of those generated in SA.
But tight exchange controls still in place in Angola and Nigeria mean that Nampak’s cash balances in the two countries keep on growing. They hit R2.4bn at the end of the latest six months, up from R2bn in September 2016 and R1.5bn in March 2016. The latter figure, of which 61% is hedged, amounted to 69% of the R3.47bn cash on Nampak’s balance sheet.
There are signs that things are improving on the Angolan and Nigerian dollar availability front. Nampak is now getting from them 80% of the dollars needed to fund imports, compared with 60% at the worst.
Nampak will also be extracting US$54m from Nigeria before the end of September.
"It shows that liquidity in Nigeria is easing a lot," says De Ruyter.
But the cash will not be going to shareholders in the form of a restored dividend. "It will be used to recapitalise our Isle of Man facility," says De Ruyter.
Nampak is no stranger to Africa, having taken its first steps into Zimbabwe and Malawi in the 1980s. Kenya, Ethiopia, Zambia and Tanzania followed. Nigeria was added in 2007 with the establishment of an operation producing food cans, cartons and labels.
The six countries combined contributed 10% of Nampak’s trading profit in 2010. It was in 2011 that the game-changing move came, when Nampak commissioned a plant with an annual capacity of 800m tinplate beverage cans in Angola. In May 2015 capacity was lifted to 1.8bn cans with the commissioning of an aluminium can line.
Nampak had little choice but to expand outside SA, where it is by far the biggest player in a mature and highly competitive industry. The appeal of other countries in Africa is also far higher profitability, which is reflected in trading margins in the latest six months — 8.9% in SA on revenue of R5.6bn and 20.8% in the rest of Africa on revenue of R2.9bn.
SA operations produced mixed results in the latest six months, with overall trading profit up 7% to R500m. Unfortunately Nampak does not provide a breakdown of SA divisional contributions other than that of its glass division.
But it is clear the best showing came from beverage can producer Bevcan, its biggest division. "Bevcan had a strong year. We are seeing operational efficiencies coming through," says De Ruyter.
Bevcan has just put behind it the costly and disruptive conversion of its production lines to aluminium and also recently commissioned a R355m can-ends plant expansion. This enables Nampak to supply the needs of its Angolan and Nigerian operations for the first time.
Nampak rules the roost in SA’s beverage can market, but won’t for much longer. A new 1.2bn/year can plant is being built by packaging group Golden Era and is due to come on stream before the end of the year.
De Ruyter shrugs off the challenge Golden Era could pose.
Warren Jervis of Old Mutual Investment Group is not so sure. "AB InBev could leverage the new capacity to put pricing pressure on Nampak," he says.
Nampak’s share price has been hammered from a record high of almost R45 in late 2014 to its current level of around R20.
It makes for an interesting share for traders prepared to bet on the oil price breaking out on the upside from its present trading range of around $50/barrel.