Can-do attitude: But volumes have dropped. Picture: Bloomberg/Sumit Dayal
Can-do attitude: But volumes have dropped. Picture: Bloomberg/Sumit Dayal

Nampak’s latest half-year results give investors little to cheer about. Top of the list of disappointing items is the company’s decision to continue the freeze on dividend payments.

Africa’s largest diversified packaging firm suspended dividends in 2016.

That was in line with the company’s plans to improve its financial position in light of high debt levels arising from aggressive capital expenditure in prior years.

When it put the dividends on ice, the company’s aim was to reduce debt, with a targeted gearing of between 40% and 60%. In the year ended September 2018, the company’s gearing was 37%, much improved from 72.6% in financial 2014.

High debt may be what triggered the move on the dividends. But in recent years other problems have emerged, prompting the group to extend the prudent approach to capital allocation.

Nampak has been taking strain from pedestrian economic growth and low disposable income in SA as well as currency volatility and weaker economic growth prospects in its major markets in the rest of Africa.

In addition to the delayed conclusion of the sale of Nampak’s glass business, these factors are holding back the company’s resumption of dividends.

A lot hinges on successful conclusion of the sale of the Germiston-based glass business, first announced last year.

Only then will shareholders be able to expect some cash from the company.

Nampak intends to return the proceeds of the sale either through a special dividend or a share buy-back, says CEO André de Ruyter.

But De Ruyter is guarded when talking about the pending sale and, most importantly, factors leading to its delay, except to say it is still on course. "It is an extremely complicated business and a very complex deal," he says.

De Ruyter is also reluctant to put timelines on the conclusion of the sale, which was first mooted in March 2018. The original plan was to have it done by April this year.

Nampak decided to sell the glass business to reduce debt and improve free cash flow. De Ruyter says Nampak is negotiating with a black-owned company that is backed by a large international corporation with "significant" glass expertise.

Nampak has another reason to be cautious. Conditions in key markets, except Nigeria, are not looking good.

Because Nampak’s operations are spread across a handful of markets outside SA, the company’s performance is susceptible to foreign currency movement.

In Angola, the devaluation of the kwanza fuels inflation in that country. However, wage increases have lagged behind.

As a result, volumes for its can manufacturer Bevcan Angola dropped 37% due to lower demand.

Nampak says it will not pay dividends "until the sustainability of cash transfers from Zimbabwe is assured and the disposal of the glass business is finalised".

Nampak’s Zimbabwe operations have struggled with liquidity, so the company was initially optimistic about the introduction of real-time gross settlement (RTGS) dollars in that country’s multi-currency system in February. The introduction of a formalised floating foreign exchange market was supposed to improve liquidity, but it hasn’t done so yet.

"Liquidity is still an issue. In the six months to end-March, we expatriated only R27m. That is disappointing," says De Ruyter.

But he says Nampak will sit out the problems in Zimbabwe and there are no plans to pull out. "The performance in terms of volumes has been good," he says.

"We have good assets and good people there. Continued presence in Zimbabwe does not add to our risks."

Ron Klipin of Cratos Wealth says he would not be an investor in the company "at this point in time". On the macroeconomic side, economic growth in SA is not conducive to consumer spend and "neither is GDP per capita, which is one of most important components in driving top-line revenue", says Klipin.

As a result, Klipin expects Nampak’s volume growth to remain constrained. He says the Africa business remains a challenge due to significant currency devaluation, which is likely to affect profits in the short term.

The company is also experiencing low margins in its UK business, in addition to the uncertainty about Brexit.

Bevcan, previously the jewel in Nampak’s crown, faces increased competition.

Klipin says the lack of dividend payments, as well as the high gearing, do not send a positive message. The company’s share price has been lacklustre over the past few years. However, he says its fortunes could improve if there is a turnaround in SA’s economic prospects.