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NAMPAK LIMITED - Voluntary trading update for the five months to 28 February 2019

Release Date: 27/03/2019 07:05
Code(s): NPK     PDF:  
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Voluntary trading update for the five months to 28 February 2019

Nampak Limited
(Incorporated in the Republic of South Africa)
Registration Number: 1968/008070/06
Share Code: NPK
ISIN: ZAE 000071676
(“Nampak” or “the Company”)


Macroeconomic environment in key markets

South African gross domestic product (GDP) growth slowed down to 0.8%
in 2018, following an increase of 1.4% in 2017. While the last two
quarters in 2018 had positive growth, higher interest rates in the
first quarter of 2019, the inflationary impact of fluctuating fuel
prices, electricity tariff increases, high unemployment and various
levy and tariff hikes will further put pressure on disposable
consumer income. This current economic climate is not expected to
change before the elections to be held in May 2019. This rather
constrained economic environment is not, however, completely negative
as consumers have been resorting to trading down to value and in-
house brands, as well as purchasing greater volumes of canned fish
and vegetables, both of which trends have been favourable.

Angola has gone through a major devaluation of its currency, the
Kwanza, against key foreign currencies which has had the intended
effect of improved liquidity. The Kwanza has devalued by more than
85% against the US Dollar since 1 September 2017. As expected, this
has resulted in significant producer price inflation, which has
driven up consumer price inflation while wage inflation has lagged.
As a result of this concatenation of events, demand for beverage cans
has softened as consumers prioritise their purchases until wage
inflation catches up and full purchasing power returns. This trend is
expected to take between 12 and 18 months to normalise, based on
Nampak’s experience in the Nigerian economy. Liquidity in Angola
remains strong with sufficient foreign currency available and
transferred from this operation to support the operations.

Nigeria is well on its way to recovery as 2018 fourth quarter growth
improved to 2.4% year-on-year lifting annual growth for the year to
1.9%. GDP growth, excluding oil, was even higher at 2.7% y-o-y for
the quarter, largely driven by the agricultural and services sectors.
This momentum in economic activity has continued into the new year,
with Bevcan volumes at Nampak’s Nigeria plant reaching record
production levels. The consumer is expected to remain resilient in
2019 and beyond, and Nampak is consequently investigating the
viability of doubling name plate capacity to two billion cans per
annum. The NAFEX market continues to operate       well   and   foreign
currencies are freely available for trading.

The Reserve Bank of Zimbabwe (RBZ) announced in its monetary policy
statement that it would establish an inter-bank foreign exchange
market, effective from 20 February 2019, to formalise the trading of
RTGS balances and bond notes with US Dollars and other currencies.
Willing buyers and sellers of foreign currency will access the new
market-based exchange platform through banks and bureaux de change.
This is expected to unlock liquidity and bring about certainty in the
foreign exchange market in future to improve the competitiveness of
the Zimbabwean economy. Nampak is evaluating in detail the impact of
this recent announcement on its operations, but views this as a
development that should in the fullness of time lead to improvements
in liquidity as experienced in Nigeria and more recently Angola. The
company is considering the impact of undertakings by the RBZ to
honour legacy debt on a 1:1 basis, as well as an agreement reached
with the RBZ to lock in the exchange rate of RTGS to the US Dollar on
an equal basis for an amount of USD57 million representing
approximately 67% of the in-country cash balances at year end thereby
providing a significant improvement in hedged portion of the in-
country cash balances. These implications, as well as the fact that
Nampak has provided a significant portion of the funding to the
Zimbabwean operations from its offshore treasury and procurement
operation and owns 51% of Nampak Zimbabwe, are expected to moderate
the impact of a potential devaluation on earnings. Consideration is
further being given to whether there has been a change in Nampak’s
functional currency in Zimbabwe, and dependent on the outcome, this
may further influence the extent of any potential devaluation of in-
country monetary items including cash balances. Businesses in
Zimbabwe continue to operate and margins and volumes have been

Divisional update

Continuing operations


The South African beverage can market is growing at low, single
digits. Volumes are being impacted by a new entrant as expected since
it commenced deliveries to customers in late 2018. A second entrant
is expected to commission its plant in the second half of the 2019
calendar year. In response, Nampak reduced its name plate capacity by
11% and removed an old tin plate line that was located in Epping,
Western Cape which was largely used for peak demand. Savings from the
closure of this line began flowing in the second half of 2018 and the
full impact of lower operating costs will be seen in 2019. Operations
excellence and other cost reduction initiatives will also lead to
stable margins for Bevcan South Africa. Divfood is experiencing mixed
demand. Improved vegetables and fish volumes have been offset by,
lower meat and diversified can volumes. Overall volumes were slightly
The Rest of Africa produced varying results – in Nigeria volumes grew
ahead of expectations; while the devaluation of the Kwanza has led to
softer demand in the short term in Angola.

Bevcan Nigeria continues to achieve good volume growth driven by the
malt category, an increase in Nampak’s market share and growth in the
underlying market for beverage cans. The consumer remains resilient
and after five quarters of positive growth, the Nigerian economy is
well on its way to recovery. The beverage can line is now approaching
full utilisation and the second line will soon be considered if
demand continues to remain buoyant. General metals packaging volumes
have also improved in line with positive consumer demand trends being

The devaluation of the Kwanza in excess of 85% in Angola since 1
September 2017 with the currency only devaluing 7% since 1 October
2018 has led to significant producer price inflation, which in turn
has meant higher consumer price inflation and consumers’ purchasing
power being eroded. Volumes have been negatively impacted and while
wages are adjusting to catch-up to the impact of the devaluation,
demand in the short to medium term is expected to remain soft. This
is similar to what was experienced in Nigeria upon the devaluation of
the Naira against the US Dollar. Demand is expected to be constrained
until wage inflation is reflected in new salaries and wages where
after demand is expected to return to former levels.


Plastics South Africa is performing as expected during a period
characterised by lower market volumes for rigids partly being offset
by improved volumes from cartons. Plastics in the Rest of Africa
largely comprises Zimbabwean operations, viz. Megapak and CMB. High
volume demand continues at these operations bolstered by increasing
exports to neighbouring countries. Plastics UK volumes continue to be
impacted by reduced demand resulting from backward integration by a
key customer and an overall weaker dairy market.


Demand at Hunyani in Zimbabwe remains strong and was supported by
regional exports, but inflationary pressures are starting to impact
the cost of raw materials. While liquidity is an ongoing challenge,
robust trading is expected to continue as long as raw materials can
be sourced. Carton volumes in Nigeria in the half year have remained
strong. The impact of the elections, customer inventory levels and
possible legislation changes may dampen volumes going forward.
Volumes in Zambia and Malawi have increased, driven by growing
consumer demand. Bullpak in Kenya has put in a creditable performance
in spite of softer market conditions.

Discontinuing operation

Volumes for glass have remained relatively flat, constrained by
production output. The period under review has been characterised by
higher beer and favoured alcoholic beverages’ volumes, while demand
for carbonated soft drinks and wine bottles has reduced. Electricity
supply from Ekurhuleni had started to improve after the plant
experienced ongoing fluctuations and supply disruptions throughout
2018. The recent load shedding has once again changed this. While the
plant itself has not been load shed, the impact on the quality of
electricity   (voltage  fluctuation)   with  load  shedding   in  the
surrounding areas has been significant.

The rotary uninterruptible power supply system has been instrumental
in mitigating any impact of these issues.

Following the decision by the Nampak Board and the announcement to
the market in March 2018 to dispose of the Glass business, a process
was initiated and has progressed as anticipated. As noted in the SENS
announcement dated 28 February 2019, Nampak entered into an
exclusivity arrangement with a preferred bidder, after review of the
offers   from  eligible   bidders.  Nampak   has  now   entered  into
negotiations in respect of the potential disposal of the Glass

The preferred bidder is a black South African-owned company and is
supported by a large international corporation with significant glass
expertise. The process is on track with a view to conclude a sale and
purchase agreement by April 2019. The preferred bidder is responsible
for its own financing of the transaction and is not reliant on Nampak
in connection with any of its funding. The transaction, if concluded,
will be subject to competition authority approval as it is considered
a large merger under South African competition law.

Liquidity and cash transfers in the Rest of Africa

Nampak has seen continued foreign currency liquidity in Angola and
Nigeria. Cash balances in these two countries reduced to R1.9 billion
from R2.6 billion at the end of September 2018 due to good cash
transfers during the period. R1.5 billion was transferred for the
five months ended 28 February 2019 from these two countries with R936
million and R529 million being transferred from Angola and Nigeria
respectively. There is currently no restriction on the transfer of
cash from Nigeria. Kwanza availability is at times the constraint in
the Angolan economy particularly when US Dollars are made available
by in country banking partners, but insufficient Kwanza are available
at the dates on which the US Dollar Kwanza bonds either mature or can
be converted to cash ahead of maturity dates.

Of the Rand equivalent of R1.6 billion cash balance in Angola, 43%
remains hedged and protected against further devaluations through
USD-Kwanza linked bonds. The new Angolan requirements for letters of
credit supporting future imports to be cash backed in country has led
to higher cash in-country cash balances and a reduction in the cash
levels hedged by US-linked Kwanza bonds. The changed import laws
have, however, ensured that foreign exchange for such imports is
secured before the importation of such goods with no additional
build-up of in-country cash relative to unsettled imports expected.
Whilst lower cash balances are hedged, the majority of the
devaluation is deemed to have already occurred, confirming the
effectiveness of the Group’s hedging strategy as it protected against
a R1.6 billion loss in FY2018. The bonds have a medium-term maturity
profile to protect against further currency adjustments as the Kwanza
finds a new stable level.

The cash balance in Zimbabwe has remained relatively stable at
R1.3 billion compared to the R1.2 billion at the end of September

Since April 2018, no further credit extension by any Nampak entity
has   been  provided   to  Nampak’s   businesses   in  Zimbabwe.  The
availability of foreign currency in Zimbabwe remains challenging and
only R27 million or 2% of the opening cash position was transferred
from Zimbabwe for the five months to February 2019.      Imports into
Zimbabwe are being funded by US Dollars provided by customers.

      28 FEBRUARY 2019                                    LIQUIDITY
                           Angola   Nigeria   Sub-total    Zimbabwe     TOTAL
Cash on hand              R1 601m    R255m     R1 856m     R1 314m     R3 170m
Hedged cash                R695m       –(2)     R695m       R798m(3)   R1 493m
% cash hedged               43%        –(2)      37%         61%(3)      47%
Cash transferred           R936m     R529m     R1 465m       R27m      R1 492m
Cash transfer rate(1)       41%       176%       56%          2%         39%

      30 SEPTEMBER 2018                            LIQUIDITY
                        Angola Nigeria Sub-total    Zimbabwe   TOTAL
Cash on hand           R2 307m   R300m     R2 607m  R1 190m   R3 797m
                                     (2)                 (3)
Hedged cash            R2 166m     –       R2 166m     –      R2 166m
                                     (2)                 (3)
% cash hedged            94%       –         83%       –        57%
Cash transferred       R1 807m R1 574m     R3 381m    R87m    R3 468m
Cash transfer rate       83%      190%      112%      13%       94%
    Cash transfer rate is the amount of cash transferred compared to
  cash on hand at the end of the previous period.
    Cash balances in Nigeria are no longer considered restricted as a
  consequence of the liquidity that has been provided by the
  introduction of the NAFEX market.
    USD57 million hedge secured (representing approximately 67% of 30
  September 2018 balance) with Zimbabwean Reserve Bank before new
  Monetary Policy announcement was made on 20 February 2019. New
  policy indicates that legacy debts relating to imports will be
  honoured on a one for one basis with the US Dollar.

Foreign exchange movements
Nampak has sizeable operations outside of South Africa and is exposed
to various foreign currency movements. As a result, Nampak’s
performance for the five months ended 28 February 2019 has been
impacted by foreign currency movements. The Naira remains fairly
stable and there has been no devaluation in the Nigerian Naira. In
Angola, the devaluation of the Kwanza that commenced in early 2018
through a series of controlled auctions by the Central Bank,
continued throughout the 2018 calendar year and into the new year,
albeit at a slower pace. For the five months ended 28 February 2019,
the Kwanza devalued by 7%. This is expected to lead to some foreign
exchange losses relative to unhedged monetary items.

The weakening of the South African Rand average rates will benefit
the translation of foreign earnings for Rest of Africa territories,
as well as Europe. Closing rates have not materially shifted since
the end of the 2018 financial period. Foreign denominated debt will
be impacted at the reporting date by fluctuations in closing exchange
rates at the reporting date.

Currency movements for key markets:

                      Average rates                       Closing rates
Currency   28 Feb    31 Mar     %      30 Sep   28 Feb   30 Sep     %      31 Mar
            2019      2018    change    2018     2019     2018    change    2018

ZAR/GBP     18.19     17.35     4.8%    17.61    18.66    18.43     1.2%    16.62
ZAR/EUR     16.08     15.36     4.7%    15.58    16.01    16.41   (2.4%)    14.57
ZAR/USD     14.11     12.78    10.4%    13.11    14.07    14.14   (0.5%)    11.86
NGN/USD    363.03    359.75     0.9%   360.61   361.07   362.79   (0.5%)   360.00
AOA/USD    313.72    189.76      65%   222.09   322.07   300.72     7.1%   218.64

Financial position

Nampak secured its financial position after implementing a R12.5
billion long-term committed revolving credit facilities and short
term loan agreement (RCF) during the 2018 financial year. 45% of
these facilities have been utilised to date with 55% remaining
available for settlement of debt in the short to medium term.

As at February 2019, the Group’s key covenants of net debt: EBITDA
being less than 3 times and interest cover greater than 4 times have
been met. The policy developments in Zimbabwe do not impact debt
covenants, as the new RCF had stricter requirements that excluded
100% of cash balances from Zimbabwe from the covenant calculations,
amongst other revisions.

Nampak has a target gearing range of 40%-60%. As at 30 September 2018
Nampak had a net gearing ratio of 37%. Gearing is closely managed.

Impact of load shedding

The majority of Nampak’s operations have not been impacted by load
shedding as local municipalities have prioritised the continued
supply of electricity in and around manufacturing hubs. A number of
smaller operations mainly for Plastics have been impacted to date,
and production is being planned around expected power outages.

Ongoing portfolio management

In addition to the sale of the Glass division, further portfolio
rationalisation opportunities are being pursued in order to sharpen
the   focus   on  strategic   and   profitable substrates.  Further
announcements will made in due course.

Board appointments

Following the retirement of Mr RC Anderson and Prof PM Madi with
effect 6 February 2019, two new directors, Messrs SP Ridley and CD
Raphiri have been appointed to board of the company with effect from
1 March 2019.

Pre-close conference call

Nampak management will hold a pre-close telephonic conference call on
Wednesday, 27 March 2019 at 15:00 Central Africa Time (GMT+2) to
discuss this trading update and address questions from the investment
Nampak will release its interim results for the six months ending 31
March 2019 on the Stock Exchange News Service on or about 29 May
2019. Nampak will be in closed period from 1 April 2019 until 30 May
Shareholders are advised that the financial information contained in
this announcement has not been audited, reviewed or reported upon by
Nampak’s external auditors.

27 March 2019
Sponsor: UBS South Africa (Pty) Ltd

Forward-looking statements: Certain statements in this document are
not reported financial results or historical information, but
forward-looking statements. These statements are predictions of or
indicate future events, trends, future prospects, objectives,
earnings, savings or plans. Examples of such forward-looking
statements include, but are not limited to, statements regarding
volume growth, increases in market share, exchange rate fluctuations,
shareholder return and cost reductions. Forward-looking statements
are sometimes, but not always, identified by their use of a date in
the future or such words as “believe”, “continue”, “anticipate”,
“ongoing”, “expect”, “will”, “could”, “may”, “intend”, “plan”,
“could”, “may”, and “endeavour”. By their nature, forward-looking
statements are inherently predictive, speculative and involve
inherent risks and uncertainties, because they relate to events and
depend on circumstances that may or may not occur in the future. If
one or more of these risks materialise, or should underlying
assumptions prove incorrect, our actual results may differ materially
from those anticipated. There are a number of factors that could
cause actual results and developments to differ materially from those
expressed or implied by these forward-looking statements. These
factors include, but are not limited to: changes in economic or
political conditions and changes to the associated legal, regulatory
and tax environments; lower than expected performance of existing or
new products and the impact thereof on the Group’s future revenue,
cost structure and capital expenditure; the Group’s ability to expand
its portfolio; skills shortage; changes in foreign exchange rates and
a lack of market liquidity which holds up the repatriation of
earnings; increased competition, slower than expected customer growth
and reduced customer retention; acquisitions and divestments of Group
businesses and assets and the pursuit of new, unexpected strategic
opportunities; the extent of any future write-downs or impairment
charges on the Group’s assets; the impact of legal or other
proceedings against the Group; uncontrollable increases to legacy
defined benefit liabilities and higher than expected costs or capital
expenditures. When relying on forward-looking statements to make
investment decisions, you should carefully consider both these
factors   and   other  uncertainties   and   events.   Forward-looking
statements apply only as of the date on which they are made, and we
do not undertake any obligation to update or revise any of them,
whether as a result of new information, future events or otherwise.

Date: 27/03/2019 07:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
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