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Pre-closed period update - Nampak first half impacted by slower growth in home market, but rest of Africa delivered
Nampak Limited
(Incorporated in the Republic of South Africa)
Registration number: 1968/008070/06
Share code: NPK
ISIN: ZAE000071676
("Nampak" or "the Company" or "the Group")
Pre-closed period update - Nampak first half impacted by slower
growth in home market, but rest of Africa delivered on promise
Nampak group performance for the first half of the 2015 financial
year benefited from the continued growth and strong performance of
our businesses in the rest of Africa, while the challenging South
African trading environment kept the pressure on the performance of
Nampak businesses in our home market.
In 2014, Nampak launched various programmes and initiatives aimed at
stringent cost management and business process improvement. These
progressed well and promise to contribute modestly to performance in
the financial year to the end of September 2015. Working capital
management also remained a focus, with recent performance better than
it has been historically.
South Africa
In the first half of Nampak’s 2015 financial year, South Africa
experienced significant economic headwinds. Both business and
consumer confidence were impacted negatively as the unfavourable
exchange rate as well as power cuts (‘load shedding’) offset the
benefits of lower oil prices and slowing inflation. Nampak’s home
business performance was not immune to this.
The South African Reserve Bank expects the economy to grow at an average
rate of 2.2% for 2015 although this might be lower given the challenges
around electricity supply.
Nampak Bevcan’s volumes continued to expand at rates above GDP
growth, with the conversion of tinplate lines to aluminium going well
with a short term impact on margins. All three aluminium lines at the
Springs site ramped up capacity. The installation of the new one
billion can line at the Rosslyn site also progressed well and is on
track for commissioning towards the end of the second quarter of calendar
year 2015. The Cape Town tinplate line will be converted to aluminium
in due course.
Progress, albeit at a much slower pace than anticipated, was made at
Nampak Glass. The key contributors to production inefficiencies and
technical issues were inadequate technical skills, hiccups in the
ramp-up of the new third furnace as well as human resource issues.
These are being addressed through keen management focus and the
implementation of a comprehensive plan which should help the business
report a profit for the full year 2015. The pack-to-melt ratio is
improving steadily. A new technical services agreement is being finalised
and a recently introduced operations excellence initiative will also
contribute towards an improvement in business performance. Furnace 3 is
ramping up, the pre-heater has recently been installed and full furnace
benefits should be reflected in performance in the 2016 financial year.
In the first half, Nampak DivFood did well thanks to a good fishing
and fruit harvest season, but margins remain under pressure. Lower
oil prices (and hence lower polymer prices) had a positive impact on
Nampak Plastics; however, this was offset by the loss of some liquid
packaging customers that will be replaced with new customers towards
the end of the year. Megapak returned to profitability.
Rest of Africa
Nigeria
During the six months to the end of March, the naira depreciated
against the US dollar mainly due to the sharp decline in oil prices.
Inflation remained within the target range of 6%-9% set by the
Central Bank of Nigeria. The impact of these changes on consumer
spending varied from sector to sector.
Nampak Bevcan Nigeria continued ramping up production, supported by
strong demand from the beverage sector. The business has little
operational exposure to the naira/US dollar exchange rate since invoice
prices are adjusted monthly based on the previous month’s naira/US
dollar exchange rate. The cigarette carton business, which is 30%
exposed to changes in Nigerian foreign exchange rates, experienced
similar volumes to those in the previous first half as demand was not
significantly impacted by the flagging economic conditions. The
general food canning business, however, was negatively affected by
the unfavourable exchange rate, as well as by lower consumer spending.
The consensus outlook for economic growth in Nigeria in 2015 is
between 5% and 6%, which is higher than the global average forecast
of around 3%. Therefore, we remain positive about the long-term
growth prospects and robustness of the Nigerian economy. The relatively
peaceful conclusion of the national election in Nigeria has added to the
attractiveness of the country.
Angola
GDP growth rate estimates for Angola in 2015 have been revised
downwards mainly because of falling oil prices, as almost half of
Angola’s economy depends on oil. Inflation, although high, is still
below the Monetary Policy Committee benchmark of 9%. Angola’s kwanza
started weakening in September 2014 and kept to a depreciating trend,
negatively affecting the supply of foreign exchange. However, this is
not expected to be a matter for long-term concern.
Nampak Bevcan Angola continued to operate above design capacity supported
by strong growth in demand. Sales volumes grew unabated and exports from
South Africa continued. The construction of the second line (that
will use aluminium as a substrate) progressed well and the line will
be commissioned in April 2015. The business, however, experienced
difficulty in sourcing foreign currency and we are working very closely
with our commercial bank to minimise delays.
GDP growth forecasts for the rest of the year range from 5% to about
7% and inflation is likely to remain below the Monetary Policy Committee's
benchmark of 9%.
Active portfolio management
On 25 March 2015, Nampak announced a series of transactions to
deliver on the strategic objective to unlock further value from our
base business through active portfolio management. These include:
* The completion of the sale of the Corrugated and Tissue divisions
to Ethos Private Equity. Following unconditional approval by the
Competition Tribunal, the sale of these divisions will take effect on
1 April 2015 and Nampak will receive a purchase consideration of
R1.53 billion.
* The sale of Nampak Recycling to Ethos for R76.3 million subject to
approval by the competition authorities. The sale is expected to be
completed early in the second half of 2015. Nampak Recycling is an
important provider of raw material to the Corrugated and Tissue
divisions. A supply agreement will be signed with Ethos for the supply
of recycled glass to Nampak Glass.
* The sale of Nampak Flexible, a low-margin business, to Amcor for a
maximum target price of R300 million, subject to approval by the
competition authorities.
The disposal of these businesses forms part of Nampak’s portfolio
optimisation strategy to unlock cash from low-margin divisions and
redeploy it into high-yield and high-growth opportunities in the rest
of Africa.
Update on key projects
Ethiopia glass furnace
In line with strategy, Nampak concluded a memorandum of understanding
for the potential acquisition of a majority stake in a proposed
greenfield glass furnace in Ethiopia, some 120 kilometres north of the
capital Addis Ababa. This project has the potential to meet significant
demand for glass in the fast-growing Ethiopian beer market. To date, the
land for the works of the greenfield furnace has been secured on a long-term
lease and a source of sand has been identified.
Nigeria and Kenya glass acquisitions
Nampak is evaluating the acquisition of operational glass operations
in both Nigeria and Kenya. Significant progress has been made on both
projects and announcements will be made in due course.
Angola glass furnace
A significant proportion of beer consumed in Angola is imported.
Recent customs tariffs on glass bottles are driving investment in
brewery capacity, with beer growth rates expected to be above GDP in
the long term. Nampak is considering building a glass furnace in
Angola. The project is still in the concept development stage and
announcements will be made as the project progresses.
Key challenges facing Nampak
Nampak has identified project execution as a key challenge to the
implementation of its strategy to accelerate growth in the rest of
Africa. The company will continue to draw from the experience and
expertise of its long standing management in the rest of Africa and
will supplement this with the recruitment of highly experienced
project execution individuals.
Outlook
Trading conditions in South Africa are expected to remain challenging
and management are therefore focusing on cost discipline and
manufacturing excellence to maintain Nampak's competitiveness.
The group’s operations in the rest of Africa are expected to continue
generating growth in revenue and profit, while the relatively peaceful
outcome of the Nigerian elections is seen as a positive development in
a key market for Nampak. Our strategy to accelerate growth in the rest
of Africa and to focus on core substrates - namely glass, metal and plastic,
remains intact and is supported by a pipeline of growth opportunities.
Disclaimer:
The information provided in this report has neither been reviewed nor
reported on by the Company's external auditors.
Sandton
1 April 2015
Sponsor: UBS (South Africa) (Pty) Ltd
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