Key message: Debt covenants have been revised, removing the short-term liquidity risk. Nampak is in full defensive mode, aiming to strengthen the balance sheet in a competitive market.
- Nampak released a pre-close update for the 11 months to August 2020.
- Debt covenants revised: The key feature was the negotiation of revised debt covenants for September 2020 and March 2021, significantly reducing the risk of a covenant breach.
- Contract extensions support Bevcan volumes: Nampak has signed a new 3-year contract extension with a major South African customer (ABI) at 85% of previous levels. While this secures volumes, it does show the competitive pressure from the new entrants. In Nigeria Nampak signed a 3-year contract with a major customer, moving from 50% to 100% of the customer’s requirements. Nampak has 4 major customers in Nigeria – the extra volumes can still be accommodated from the existing line.
- However, extensions are at lower margins: margin pressure remains when renewing contracts, further evidence of the impact of new competition in the market.
- New export contract: Nampak has secured two new short-term (1-year) export contracts for up to 800m cans (bodies only, no ends or tabs). This opportunity is due to the customer having a short-term supply constraint as a new facility is being established. This allows Nampak to keep a full line running for the next year (local demand with the new competitive capacity means Nampak can only utilise 4 of 5 lines for local demand).
- Nigeria volumes good, Angola weak: Nigerian sales in August were a record, but in Angola sales have halved over the past year, with a recovery starting off a low base.
- DivFood and Plastics set for FY21 profitability: restructuring in both divisions should result in a return to profitability after losses in FY20.
- Capex cut: Management will try to keep capex to below R350m for the next two years, half the level of the previous two.
- With reduced balance sheet concerns, we increase our Target Price to R1.55 (from R0.37). Nampak remains in defensive mode, with growth likely to be limited in a competitive market and with capex restrictions.