Nampak vs Bowler Metcalf – The lopsided battle of the packaging companies

Everything we buy, whether groceries, consumer goods, household consumables, drinks or take aways, it’s wrapped in plastics. Not surprisingly, global consumption has grown at 4% per annum since 2009 and this is unlikely to change, particularly in the developing world, as ever more people purchase fast moving consumer goods. Actually any goods. In this post, I will analyse two JSE listed packaging businesses that may stand to benefit from this trend.

Bowler Metcalf Limited (BCF) is a medium sized plastic business with 800 employees and operations exclusively in the plastics in South Africa. They are well entrenched into the supply change of producers of personal care, chemical and food packaging items. After the huge windfall from the sale of the Softbev business last year, they paid an approximately 30% special dividend, handsomely rewarding patient shareholders. In the 30 June 2019 Annual Results they reported earnings and revenue that were operationally steady. These results should be regarded as a win in an environment that was hampered by violent strike action, load shedding and a depressed market reflective of the overall economy.

At a share price of R7.20, or a market cap of R650m, earnings of 88c reflect a PE of 9 and dividends of 40c yield just over 5%. Importantly, BCF is essentially ungeared, so earnings are also reflective of the return on equity, which is sitting at just over 10%.  However, the company has a cash pile R380m and if we strip out the cash and the interest income from this cash, the plastic operation is currently trading at a PE of approximately 6.5 and a higher ROE.

Management recognises the undervalued nature of the business and is utilising at least some of the cash hoard by progressing a share buyback program of around R40m or 6% of the outstanding shares.

Management is well invested to share in the future prospects of the business with a holding of around 26%. The CEO, Paul Sass, in particular, controls in excess of 20% of the company and has recently increased this stake at the current share price.

Nampak Limited (NPK) is Africa’s largest packaging group with a leadership position in beverage cans and some involvement in metal, plastic, liquid carton and paper packaging with presence in 13 countries including SA, Angola, Nigeria, Zimbabwe and the UK. The groups 49 manufacturing operations and 5600 employees outsize BCF significantly and hence the group trades at a market capitalisation of approximately 8 times BCF, at R5bn.

A decade ago, they were almost 100 times the size. Several overaggressive expansions, troubles in some very difficult African jurisdictions, an overall Africa sell off and high leverage have decimated the share over the last decade.

The contrarian value investor in me immediately springs to attention at the face of such share price devaluation. Perhaps, this is the perfect cheap entry point into business with a plethora of African operations, including Malawi, Ethiopia, Nigeria and Angola, consumer markets that are set to grow very rapidly in the coming decades? This might be a value play that beats boring old South Africa focussed BCF’s pure plastic business.

As a result of the many moving parts in Nampak, it is difficult to find sustainable earnings estimates. EPS stood at R1.69 for the 2018 Financial Year. This included “abnormal items” of R450m. Abnormal items in the previous year (2017) were R490m. How many years of abnormal items does it take, before they become normal to the cost of business in Africa? We should therefore assume that these “once offs” are set to continue.

In stark contrast to BCF, Nampak is heavily geared with R12bn in debt more than twice their market cap, resulting in interest payments of close to R500m per annum. Of even more concern is their cash flow, with cash of R3.5bn held in Zimbabwe and Angola, countries with notoriously difficult repatriation of forex. If we include Nigeria, the cash “stuck” in dodgy destinations is approximately R4bn; 80% of the market capitalisation of the business or around three years’ worth of profit. If they fail to recover even some of this cash, liquidly will be severely impaired. Not surprisingly, given the cash flow constraints, the company has not paid a dividend in years.

Results for the 2019 financial year end were announced on 26 November 2019 and contained many of the expected surprises. Huge currency write downs in Zimbabwe and further “abnormal items” of R270m brought earnings down to 54c. Even if we are generous and add back the currency losses from Zimbabwe, the business made around R1.40 for 2019. At a share price of R6.5, this puts them on PE of approximately 5, only slightly lower than the BCF operation.

Three Nampak executive directors were paid R35m in 2018. In comparison, the two BCF executive directors took home R9m. Unfortunately, Nampak does not disclose management shareholding or any shareholder information for that matter. However, it is safe to assume that management does not have the same amount of skin in the game that their BCF counterparts share with shareholders. To add to the worries for Nampak shareholders, CEO Andre de Ruyter will leave on relatively short notice to try and fix Eskom. This means they are on the hunt for a new CEO in the middle of a debt crisis.

In summary, in BCF we have a small steady operation that is sitting on huge cash pile, no debt, pays a handsome dividend, has a history of shareholder wealth creation and has a management team that is aligned with shareholder interest. In Nampak, we have a large multi-country, multi-asset operation that is well positioned across the continent, profitable and cheap, but that is struggling with cash held in questionable jurisdictions, a huge debt load and upheaval within the management team.

I remain a happy shareholder in BCF and will give Nampak stock a hard pass.