Packaging group Nampak has disappointed investors for many years. It's now working on changing its pattern of weak performance. It has new management, its board is being rejuvenated - with former Reserve Bank governor Tito Mboweni joining as chairman from June this year - and there is a new strategic plan.
Rising demand in the local economy, disposals or turnarounds of loss-makers and curbs on capital spending should help lift the group's earnings sharply this year. "Without the losses and with lower capex, we expect to be quite profitable," says CE Andrew Marshall.
The questions are about the strength of the recovery, and whether it will last. The answers may depend in part on whether the strategic plan outlined so far is radical enough - and on how much further management may be willing to go.
The new regime is signalling a fresh approach to capital usage, operational control and governance. Marshall, who joined the company last March, has closed or sold several nonperforming operations, slashed head-office costs by R35m and given operational managers more autonomy.
New approaches are clearly needed. The company, which has annual turnover of R20bn, has long struggled to grow consistently. The share price, at R16, is almost unchanged since mid-1994.
Its problems have occurred at both operational and strategic level. It has made large capital investments, local and international, over the years for little return. In 2002, it acquired Malbak's packaging activities in the UK and Europe for R2bn, at an exchange rate of R16/£. Eight years on, the rate is R12/£ and the assets acquired in that deal often have not been great performers.
Last year it reported a dismal performance in bringing a new corrugated paper mill at Rosslyn into production. The project cost R798m instead of the planned R504m and was commissioned six months late, delaying supplies. Marshall says about R1,4bn or a quarter of the group's R5,6bn capex invested over the past five years went into operations that have underperformed. Nampak's net borrowings have surged over this period from R578m in 2005 to R2,91bn in 2009. A strategic review found that 80% of the group's operations were profitable and had sustainable competitive advantage in their markets, but 20% were loss-making or had made inadequate returns for years. Several of these have since been sold or closed.
The plastics business in Leeds, in the UK, one of last year's loss-makers, is now making a "quite a decent profit", says Marshall.
Elimination of these losses and the turnaround of the corrugated division, which Marshall says is now making a small profit, could make a significant difference to the group results this year. Cash generation should also improve. The strategic plan includes cutting capex, which was R1,13bn last year.
"Our aim is to start generating cash and make the assets work. We also want to bring the debt down," says Marshall.
These measures should all help, but will they be enough to improve long-term growth and ensure a more consistent performance? One concern is that part of the explanation for the company's weak long-term record may be structural.
It has stayed in packaging but, by international standards, has an unusually diverse range of activities in the sector. These cover the spectrum from metal cans and glass containers to plastics and packaging and closures. It also has substantial operations in SA, 11 other African countries, Europe and the UK.
"We do recognise there may have to be more focus," says Marshall.
In SA, where Nampak is by far the dominant producer of packaging, growth is likely to be in line with the economy, at about 3%-4%. However, Marshall expects good growth opportunities elsewhere in Africa, in countries such as Nigeria and Angola.
These markets may seem riskier than SA, but the growth, and the margins and returns, are often higher. These could absorb significant capex but the investments, he says, are likely to be mainly incremental rather than large projects.
With the 12-month p:e rating at almost 19, the immediate earnings recovery is mostly reflected in the share price. The stock is rated a hold on the I-Net consensus forecast. There are still significant risks, including currencies and SA's high cost structure for manufacturers. Nonetheless, the company may now be better positioned to improve its long-term returns.
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