Nampak’s results currently worse than warning suggested

The way investors have been dumping Nampak shares in the past few days creates the impression that shareholders and management are looking at two completely different sets of results for the financial year to September 2019.

Management warned shareholders on November 25 that earnings and headline earnings per share (EPS) would decline dramatically, with headline EPS expected to drop by between 67% and 72%. The real figure came in at 54.1 cents – 69% lower than the 173 cents reported for the year to September 2018.

Shareholders seem to have opted to focus on the bottom line of the income statement, which showed that Nampak actually suffered a comprehensive loss of R2.3 billion in the last year, compared with a profit of just less than R873 million in the previous financial year.

Their reaction was nothing short of brutal, sending the share price down nearly 26% from R7.40 at the time of the trading update to only R5.50 after the announcement of the results two days later.

Nearly 1.3 million shares traded on November 25 alone, valued at more than R8 million. The share price reached its lowest level in more than ten years and is now nearly 90% lower than the peak of R44 in February 2015.

Another million shares traded on Tuesday, dropping as low as R5.35.

Nampak’s market capitalisation declined from more than R40 billion in 2015 to less than R3.7 billion on Tuesday.

The results for the year to September show that profit took a hit from write-downs of more than R1 billion against the Zimbabwean operations, comprising net foreign exchange losses of R1.9 billion and a positive adjustment of R832 million due to hyperinflation in Zimbabwe.

Ironic twist

It also includes a profit of R795 million on a currency hedge Nampak negotiated with the Reserve Bank of Zimbabwe, but in an ironic twist this was written down by 85% (R719 million) as an expected credit loss. It seems that management realised – a bit late – that the Reserve Bank of Zimbabwe won’t be able to honour the commitment.

That left an operating profit of only R254 million, which was shallowed up by net interest paid of R246 million.

Interestingly, Nampak succeeded in paying R396 million tax on its profit of R6 million for an effective tax rate of nearly 6 600%.

Add the losses of nearly R800 million from businesses that Nampak put up for sale and classified as discontinued operations and shareholders stare at a total loss of R2.3 billion. Luckily, direct interest in subsidiaries shoulder part of the losses, which leaves Nampak shareholders with a loss of R1.13 billion.

Basic earnings per share are reflected as a negative R1.32 compared with the earnings of 76 cents per share in the previous financial year.

The other view

However, one gets a total different picture of Nampak when reading management’s commentary to the results.

In a press release titled ‘Nampak announces good operating performance’, outgoing CEO Andre de Ruyter says the businesses in the group operated well and that Nampak has managed to mitigate the impact of weak macro-economic conditions and increasing competition by managing factors within its control. He concludes that the packaging company produced good results.

Shareholders would tend to disagree.

Revenue declined by around 8%, while operating margins also declined from nearly 10% to less than 9%, before all the write-offs needed in the Zimbabwean businesses.

Management says that removing the impact of net foreign exchange losses in Zimbabwe would see normalised headline EPS of R1.58.

This figure might give shareholders a bit of hope, especially the optimists who have been buying the millions of shares that sellers have been dumping.

The share price of R5.50 and headline EPS of R1.58 would put Nampak on a price/earnings ratio of less than 3.5 times.

Maybe the buyers are seeing something the sellers are not. They might see the normalised EPS figure as realistic and be hoping for recovery in the underlying businesses.

Nampak did say that the Zimbabwean business has been written down to nothing and that it is self-funding. It mentioned in the commentary to the results that it stopped extending credit to Nampak Zimbabwe in April 2018.

Nampak is determined to reduce debt, something that has become common among a lot of SA companies lately. It is set to raise R1.9 billion from asset sales and expects to receive the proceeds within the next few months.

Long-term loans have already declined by nearly R1.9 billion during the past year and total long-term liabilities by more than R2 billion. Current liabilities increased slightly, by R400 million, mostly due to the current portion of long-term debt due in the next 12 months.

The cash flow statement shows that net cash flow before financing activities increased to nearly R1.1 billion, compared with R323 million in the prior year, which means that a valuation of the share price on cash flow basis would yield a much better result than only looking at the low earnings figures.

In addition, management concluded in a presentation to shareholders and fund managers that it made a lot of progress in adjusting its portfolio of businesses to the current economic reality and improved its operations.

Shareholders can only hope that this is indeed the case, and that Nampak appoints a new CEO who can deliver profits and dividends.

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