Subscribe

The market dished out a slap to Nampak that even Will Smith would be proud of. The share price closed nearly 7% down after releasing a voluntary trading update for the five months to the end of February 2022.

It’s not obvious why the share price took pain yesterday until you read through the entire announcement.

The announcement starts out by noting strong demand for products, with volume growth for beverage cans driving revenue growth of over 20% vs. the corresponding period in the prior year.

The metals business is where the demand for beverage cans was enjoyed, with aluminium price increases driving higher selling prices as well. The increases were passed through to customers using contractual pass-through mechanisms. The metals business also benefitted from a strong result in Nigeria, a better result in Angola albeit off a low base and a really good second quarter in the DivFood business with fish can sales as a particular highlight.

The plastics division delivered an outcome that you won’t read every day: the performance in the Zimbabwe operations was stronger than in South Africa!

Interestingly, Zimbabwe was also a source of happiness in the paper division, along with improved volumes in Zambia and Malawi. In this division, revenue and trading profit were “significantly” up which shareholders will be pleased to hear.

Despite the input cost pressures that are a feature of the current business landscape, operating profit also increased. Importantly, so did EBITDA for covenants, as Nampak has been on a road to balance sheet recovery for some time now. Nampak complied with funding covenants for the three months ended December 2021.

The first sign of any trouble is in the section dealing with cash repatriation. Transfers from Angola were fine but foreign currency availability in Nigeria has slowed. It’s really important for Nampak to be able to get the cash out from Africa, so I suspect this is what spooked the market.

The balance sheet risks are exacerbated by the need for higher working capital requirements. Supply chain pressures are driving higher investment in inventories to ensure supply of raw materials.

The company is also struggling to sell the non-core assets due to current market conditions. Again, this isn’t great news for the balance sheet.

Of the R1 billion non-recourse trade finance facility, around R400 million has been utilised. R206 million of that number was used to permanently reduce the group’s banking debt. Nampak is also trying hard to limit the working capital investment by negotiating with both debtors and creditors. The idea is to get paid faster by debtors and to take longer to pay creditors.

Nampak is required to reduce net interest-bearing debt by R1 billion by 30 September 2022. The funders will assess the situation on 30 June 2022. The pressure on working capital and the lack of success in selling non-core assets makes shareholders worry about the risk of an equity capital raise to settle the debt.

The earnings story looks promising, but Nampak needs to convert assets and profits into cash and only has a few months left to do so.

Nampak’s share price chart is fascinating. It is up over 25% in the past 12 months but the latest sell-off means that the year-to-date performance is flat.

KAP has provided an operational update and trading statement covering the eight months to 28 February 2022. This is effectively the most recent interim period (for which results were released) plus another two months.

PG Bison is performing well thanks to demand in the domestic and export markets. The eMkhondo particleboard plant expansion was commissioned in February/March and has added 14% additional production capacity to the division. This will offset much of the anticipated production losses due to scheduled maintenance in the second half of this financial year.

The Restonic business can’t say the same unfortunately, with a slow start to the period and pressure on raw material costs. KAP does highlight that the second half of the year is usually better than the first half in this business, which shareholders will hope to be the case.

Automotive components company Feltex has been struggling with technical challenges. Performance has improved into the second half of the financial year, as these challenges have been resolved and there is more stability in vehicle build volumes.

The narrative around Safripol sounds really positive, with the double-whammy benefit of strong demand for all three polymers and higher selling prices. Local manufacture and supply is favoured by global supply chain issues.

Unitrans is stable at least, with South Africa performing better than operations in other countries, especially Botswana.

Shareholders will be pleased to know that KAP does not have exposure to the crisis in Ukraine, other than the obvious macroeconomic impacts that affect all companies.

These are very early days for a trading statement (only eight months of the year have been completed), but KAP has indicated that HEPS should increase by at least 50% for the full financial year vs. the previous year.

That implies HEPS of at least 64.5 cents, which puts KAP on a forward multiple of 7x if that number plays out as expected.

Barloworld rallied more than 9% yesterday based on a voluntary trading update for the five months to 28 February. The share price has taken a nasty knock this year based on the group’s exposure to Russia.

This is a strong group and I was incredibly impressed with the company’s balance sheet management over the course of the pandemic. With some smart dealmaking and great capital allocation strategies, Barloworld weathered the storm and arguably emerged stronger.

In the Equipment southern Africa business, revenue for the period was up 2.3% thanks to activity in other African countries, as South Africa was subdued due to delayed deliveries. The good news is that the revenue is still coming, with the firm order book up by 43% to R4.6 billion based on strong mining demand and improved activity in South Africa.

Despite the modest increase in revenue, operating profit increased by 4.8% as expenses were tightly controlled. Operating margin expanded 20 basis points to 8.8% and EBITDA increased by 12.1%. The margin improvements were assisted by a return to profitability in the Bartrac joint venture in the DRC.

There’s a distinct narrative in the market around working capital pressures and Barloworld hasn’t escaped them, with a strong order book putting pressure on cash flows as Barloworld prepares to fill those orders. This isn’t a problem provided the cash is available, as return on invested capital (ROIC) on a rolling 12-month basis is 16.5%.

Equipment Eurasia is having a much tougher time at the moment, not least of all based on the needs of employees. Trading is restricted as one might imagine, with a difficult environment of rules and sanctions. The company has already suffered some cancellations and expects more based on the current disruptions, including the announcement by Caterpillar of the suspension of manufacturing facilities at the Tosno plant in Russia. The conflict has really derailed an otherwise excellent story, as the order book was at record levels at the end of February.

Barloworld flags that an impairment (accounting write-down of assets) could be on the cards here. I struggle to see how that situation would be avoided unless things improve significantly and very quickly. Despite the obvious risks, the underlying business delivered revenue growth of 11% in this period with Russia leading the way. EBITDA cash conversion was 90% so the cash follows the profits.

One must remember that this period was only impacted in its final few trading days by the Russia/Ukraine conflict. The numbers aren’t a reflection of what the next few months could look like.

Ingrain (the business that Barloworld tried hard to wriggle out of buying from Tongaat) grew revenue by 48.1%. The operating margin has decreased though based on a normalised sales mix. The company’s exposure to maize price fluctuations is limited thanks to the hedging strategy and it has secured enough maize to meet customer demand well into the next financial year.

The car rental business posted a whopping 205% increase in operating profit vs. the prior year and is 17% up on pre-Covid levels. Insurance business has rebounded and so has travel. Despite trading volumes being at just 65% of 2019 levels, the record EBITDA margin of 27.1% has driven a strong result in operating profits. Fleet utilisation averaged 79% (300 basis points higher than the previous year) and various other management initiatives have paid off.

The Avis Fleet business is also looking stronger, with operating profit up 17% vs. last year and 10% vs. the pre-Covid period. Record EBITDA margins of 54% (vs. 48% in the prior period) bear testament to management’s skills in managing through difficult times.

Barloworld is looking at ways to exit its car rental and leasing business, Avis Budget. This may even include a separate listing via an unbundling.

Many of the logistics businesses were sold and the remaining businesses are dedicated customer contracts which are either being transferred or exited in an orderly manner. Barloworld is engaging with potential buyers for the Supply Chain Solutions business.

After paying a special dividend in January, Barloworld is well within target debt and gearing levels. Net debt to EBITDA is 1.2x (the target is to be below 3.0x) and EBITDA cover is over 8x (vs. group target of over 3x).

Interim results for the six months to March 2022 are due in May. If there is enough certainty of a difference of more than 20% in earnings vs. the prior year, a trading statement will be released before then.

This was an impressive update and I’m not surprised that the market liked it.