Nampak records R2.4bn loss

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NTANDO THUKWANA: Next we look at packaging goods company Nampak which released [interim] results today. The company reported losses of a staggering R2.4 billion. They also reduced the size of their rights offer to R1 billion. They initially were asking for R2 billion. Then, after some shareholder pushback, they reduced that to R1.5 billion.

I have Anthony Clark, the founder of Smalltalkdaily Research on the show. Thank you for joining us, Anthony. Firstly, what do you think of the fact that the company has decided to reduce the size of its rights offer?

ANTHONY CLARK: Good evening, and hello from trendy Cape Town. It came as no surprise to me.

I think the initial shock we had last year, when the company was contemplating a very large rights issue to restructure its debt, really hit the share price hard, and we’ve seen the stock is down about 80% in the last 12 months.

But I think the activist investors who became involved in the stock a few months ago realised that restructuring, along with asset sales, would mitigate much of the rights issue.

And the fact they’ve now brought it down to R1 billion, or potentially less, was one of the reasons why I believe the share price had a nice run today alongside the very upbeat and pragmatic presentation that the new CEO, Phildon Roux, gave.

New Nampak CEO Phil Roux. Image: Nampak

So I think there’s a line in the sand that has been drawn, but R1 billion is maximum. It might even be less, depending on how the asset sales go in the next few months.

NTANDO THUKWANA: And what is your view on their debt-reduction plans and, in your opinion, what should they actually be doing to get the company to more sustainable debt levels?

ANTHONY CLARK: I think it was very telling this morning that Phil Roux – who has a history of being a turnaround guy, cutting costs and improving companies’ underlying operating profits – has come in.

He was quite clear that Nampak over the years has spent too much money expanding very extensively into Africa, and that has now come back to bite it in an extremely hard way, given the losses they’re seeing in Nigeria and Angola and the foreign currency situation.

That has necessitated a huge debt rollup in the last two years which now has to be addressed, given the current market value of Nampak is around R480 million. It’s a microcap. I think they have no choice.

They [investors] basically realised this morning [Wednesday] that Nampak is integral to the underlying food and beverage chain in this country.

You’d think, if you think of it logically, [that if] Nampak didn’t exist, pretty much all the packaged foods that you’d get in this country in a can wouldn’t be there – Lucky Star pilchards, many of the alcohol and soft drink beverages, etc.

I think the customers and the company realise they have to put themselves on a correct footing in order to keep the supply chains going.

The right thing to do is to restructure, sell off the assets that aren’t doing that well, which we all know [are] those in [rest-of] Africa, particularly in Nigeria, and focus on where the money is really made, which is the domestic economy in …

The rest of the operations can be parcelled off and eventually sold. I think once they do that, the company should get back onto a much more solid footing, become profitable again, and hopefully the activists involved will see a nice return on their money, as will shareholders.

So basically it is sell all the assets in Africa and stick to what you know, which is in this country.

As your listeners will know, pretty much every South African company that has moved into Africa has come back tail between its legs, having lost millions or billions. Nampak is the latest example.

NTANDO THUKWANA: Can you provide a bit more colour on how the company actually got here? You speak about the fact that they had ambitious plans to expand into Africa, but what has been their biggest failing in those regions?

ANTHONY CLARK: Well, we’ve had a succession of management in Nampak over the last 10 or 15 years, and every management has its own style. Let’s not forget [that in] this economy – which is currently in a very dire state, has been in dire straits many times before – companies look to diversify their underlying revenue base outside of South Africa, and they think, where should we go? They normally look into Africa or internationally.

In Nampak’s case, they were dominant in this country, decided to expand into Angola and particularly Nigeria, where the underlying currency fluctuations and of course the volatility of the economy – which is very much denominated by oil – basically saw the company have significant losses from those operations, as it simply couldn’t compete.

And when it did compete, by translating that money they made back into the rand [from] the volatile naira in Nigeria, they basically saw the company record massive forex losses.

The recent interim results recorded a forex loss of R571 million, which contributed to the impairment, the loss you mentioned, of R2.4 billion.

Sometimes it is not good to expand into areas of Africa. You just do not understand [these markets], particularly where there’s political instability and/or a country denominated by one commodity, in this case, oil.

Angola and Nigeria are oil-based economies. When the oil price tanked, so did the economy and Nampak quite frankly was caught.

NTANDO THUKWANA: Anthony, put yourself in the CEO’s seat to try and turn the ship around, what would be your first priority and your first fix in the company?

ANTHONY CLARK: Well, if I was Phil Roux – or as I nicknamed him many, many years ago, ‘Silver Must’ … for his efficiency at cutting costs – if you look at the underlying Nampak accounts, there are certain elements that can easily be trimmed to cut costs.

For example, they have a treasury function sitting in the Isle of Man, which is a tax saving off the coast of the UK, which costs R50 million a year. Why?

They keep an apartment in London for the executives’ use. What’s its value? R50 million. Sell it.

You’ve got a bloated business. As Phil mentioned [on Wednesday] morning, [Nampak has] 500 cellphones floating around the country. Heavy overtime, heavy operating costs, factories which are not running efficiently, operations in disparate parts of Africa, which perhaps are not pulling their weight. The easy thing is to trim the fat and cut costs.

Clearly, Nampak over the years has become bloated and complacent, and the activists alongside the new CEO clearly see that this fat company needs to be put on a diet. I think the answers will come very quickly and it’s all about trimming fat to get back to an operationally lean business.

NTANDO THUKWANA: Sure. Thank you so much, Anthony. That was Anthony Clark, founder of Smalltalkdaily Research, helping us to zoom into the financial results and the rights issue being proposed by packaging goods company Nampak.