Nampak

NAMPAK LTD
COMPANY REPORT
NAMPAK LTD
COMPANY REPORT

CEO | Andrew Marshall | | |
Industry Overview:
The containers and packaging is a sector characterised by a few large players and a number of smaller niche companies. The sector is highly competitive, with price being the largest determinant of revenue volume growth amongst the bigger players. Therefore profitability is driven through efficiencies and economies of scale. Demand for products is driven indirectly through growth in non-durable product demand by consumers especially within the food packaging and drink packaging businesses. The two biggest costs that the industry faces is raw materials; including the oil price, steel, tinplate, aluminium as well as paper and pulp prices; and unit labour costs. Labour costs and disruptions have been a big concern in recent months due to strike action by employees resulting in lost capacity and reductions in volumes produced. Labour costs and the escalation of which has posed the biggest concern to mining and manufacturing industries, resulting in the awarding of above-inflation wage increases, which, for a highly competitive industry such as this one will result in margin erosion due to the inability to pass higher costs onto customers. The ability of businesses to interact effectively with their respective unions as well as improve working conditions for workers is becoming increasingly important and management’s ability to improve labour relations is imperative to margin growth or the prevention of margin erosion. The strong players in this market improve profitability through greater scale and efficiencies or for the smaller players through production of specialised niche products that offer larger margins but lower volumes. This review will concentrate on the larger listed market players that are more comparable to Nampak’s operations as opposed to the smaller niche operators with whom Nampak rarely competes with.
Competitor Overview
Astrapak
Astrapak specialises in the production and supply of plastic packaging materials. It operates nationally through two divisions; Flexibles and Rigids. These businesses supply specialised plastic packaging to the food, beverage, confectionary, fruit, petrochemical, industrial and general merchandise markets. The operations are focused on specific areas from high volume, low cost producers to high tech specialised companies.
Products produced:
Flexibles:
* In-mould, wrap-around and canning labels. * Multilayer barrier films for meat, cheese and related products. * Refuse bags, shrink films, shrouds and heavy duty industrial bags. * Modified Atmosphere Packaging (MAP) for perishable products and frozen food. * Shade cloth for consumer, industrial and agricultural markets. * Stand-up pouches for confectionary, baking powder, pet food, pool chemicals, fabric softeners and wine. * Pallet-stabilising cling-wrap.
Rigids:
* PET containers for soft drinks, mineral water bottles and general cosmetics bottles. * Niche producer of jars and tubes for the personal care industry. * Plastic container closures. (e.g.: Aromat) * Tubs, containers and lids for the dairy industry. * Plastic containers for the healthcare, home and personal care, beverage and industrial markets. * Thermoformed tubs and trays primarily for the dairy and food-related markets. * Rigid plastic components. * Environmentally friendly PET packaging.

Mpact

Mpact is a leading Southern African producer of paper and plastic packaging. In 2011, approximately 90% of total revenue was derived from products of which Mpact is the largest producer in Southern Africa. The group operates within two businesses; Paper Business and Plastics Business. The group has 29 operating sites, 22 of which are manufacturing operations based in South Africa, Namibia, Mozambique and Zimbabwe.
Paper Business:
The paper business consists of three divisions: 1. Recycling: * Largest paper recycler in South Africa. * 70% of the recovered paper collected by the group is consumed internally in the production of packaging and industrial paper, while the remaining portion is sold to external customers including Mondi Shanduko Newsprint. 2. Paper Manufacturing: * Manufactures recycle-based packaging and industrial paper grades such as containerboard and carton board. * Approximately 20%-40% of the containerboard is consumed internally in the production of corrugated board and the remaining portion is sold to other producers of corrugated packaging products.(Also used for cards and book covers) * Customers include corrugated board and box producers. 3. Corrugated Packaging: * Manufactures and sells a comprehensive range of printed and unprinted converted corrugated products, including board (used to manufacture corrugated packaging, boxes, folded glue cases, trays and point-of-sale displays). * All packaging is custom made to specific customer needs and can be printed as required. * Customers include; producers of agricultural, fast-moving goods and other durable and non-durable goods that use packaging primarily for the protection of products in-transit.

Plastics Business:
Leading producer of rigid plastic packaging in Southern Africa.
Products include: * PET preforms, bottles and jars. * Plastic jumbo bins, wheelie bins and plastic crates. * Plastic FMCG containers other than PET, such as bottles, jars and closures, with in-mould labelling. * Styrene trays, fast food containers and clear plastic films.
The plastics business serves a diverse customer base from multinationals to regional manufacturers in the fast-moving consumer goods (FMCG) market, (Carbonated soft drinks makers; producers of personal care, home care, pharmaceuticals and food products), fast food producers, agricultural producers and retail chains.

Bowler Metcalf:

Bowler Plastics:
Specialises in the manufacture of rigid plastic packaging for the toiletry, cosmetic, household, pharmaceutical and food markets. The division focuses on customised solutions rather than large volumes, standards market.
Products include: * Tube manufacture for the toiletry, cosmetic, pharmaceutical and toothpaste market. * Labels * Injection stretch blow-moulding for bottles from 50ml to 5L. * Injection moulding for closures, jars and sticks. * Injection blow-moulding for roll-on deodorant bottles.

Quality Beverages:
The division manufactures and distributes carbonated soft drinks under their own (Jive) and proprietary brands (P ‘n P), specialising in unique flavours.

The South African packaging industry recorded significant growth in recent years due to an increase in consumer expenditure on food and a rising demand from end-user markets like food and beverages, pharmaceuticals and personal care products. In addition, the rising demand for pharmaceuticals and personal care products is also aiding packaging industry growth. Other factors that will affect the South African packaging industry over the forecast period are the population’s changing lifestyles, cheaper imports due to low excise duty, technological advancements, recycling trends, and a structural shift from plastics to glass. Official retail sales data released by Statistics South Africa shows that the growth in non-durable goods retail sales volumes slowed from 5.5% year on year (y-o-y) in 2012Q1 to 3.4% y-o-y in 2012Q2 and the results from the latest Ernst & Young / BER Retail survey suggest that volume growth slowed further during 2012Q3. In addition, petrol and grain prices are once again on the rise, which will put added strain on the purchasing power of households and weigh on volume.

Nampak

Nampak is Africa’s largest packaging manufacturer with operations in South Africa, 12 other African countries and 6 European countries. The group specializes in the manufacture of packaging products from metal, glass, paper and plastics. The company has four operating divisions, consisting of; Metals and Glass, Paper and Flexibles, Plastics, and Tissue. The metals & glass division produces beverage, food and aerosol cans as well as glassware. The paper & flexibles division produces boxes, cartons and paper bags. The plastic division manufactures PET beverage bottles, as well as milk and juice bottles. The tissue division produces a range of tissues, toilet paper and disposable nappies. South Africa is Nampak’s biggest market contributing 78% of operating profit. The group is a major player in the South African consumer non-durable industry, operating with a domestic market share of 32% across all their business units. Recent years have seen Nampak consistently increase their exposure in Africa, now with 19 operations in 12 African countries. The management view Africa as the future profit driver for the group and have committed to a $500mn expenditure on capital expansion in Africa in the medium-term. The group follows a strategy of following its major customers out of South Africa through exports and creates hubs in key growth areas once manufacturing capacity is established. Management’s broad strategy for Africa is to be able to generate at least 25% of revenue from the rest of Africa by 2017. African operations currently only comprise Metals & Glass and Paper & Flexibles. European operations consist solely of Plastics, with an emphasis on milk bottles.

Products include: 1. Metals & Glass * Tinplate beverage cans (including specialist cans e.g.: Castle Light temperature cans) * Two and three piece food cans. * Aluminium and tinplate aerosol cans. * Aluminium ends. (Distell, Douglas Green and other wineries.) * Tinplate closures. (Baby food, peanut butter & jam) – Tiger Brands * General line cans. * Decorative and promotional tinware. 2. Paper and Flexibles: * Corrugated boxes and folding cartons. * Labels. * Plastic, paper and aluminium laminations. * Self-opening bags. * Pouches. * Multi-wall sacks. * Major “flexibles” customers: Tiger Brands, AVI, Unilever, Simba, Nestle, Distell. 3. Plastics: * HDPE bottles for milk and fruit juice. * Liquid packaging cartons. * Closures for PET bottles (Coke, Valpre, Pepsi, Nestle Water, Energade, Clover) * PET bottles. * Tubes. (GSK, Colgate and Unilever) 4. Tissue: * Toilet and facial tissues (including Twinsaver brand) * Disposable nappies. * Feminine hygiene and incontinuance products.

SWOT Analysis:

Strengths: 1. Scale of operations and the related economies of scale that arise from large volume production. 2. Geographic diversity through operations in Africa, which have been highlighted by the group as a major future profit driver for the group. * The group is aggressively investing in its African business, and plans to spend $500m on facilities there over the next three years. * West Africa, particularly Nigeria is the focus areas for the group to expand existing operations in the region. $350m is predicted to be spent on this region. 3. Strong reputation and brands in South Africa, which gives the group a greater ability compared to rivals to pass on higher unit costs to customers without reducing volumes. 4. Greater product diversification, allowing operations to “piggy-back” on one another to create a more synergistic flow between operations and therefore increase efficiencies, reduce costs and improve margins. 5. The business portfolio largely comprises businesses that satisfy the following criteria: i. Substantial market shares, generally in excess of 30% and ranking in the top three companies within each division. ii. Significant barriers to entry due to the cost of investment in new capacity as well as long-standing relationships with suppliers. iii. Existence of long-term exclusive supply contracts with cost escalation formulae.

Weaknesses: 1. Doesn’t produce niche products which can command a higher price and therefore greater margins. 2. Exposed to changes in raw material prices including steel, tinplate, aluminium, paper and pulp. An increase in the petrol price substantially increases group transport costs. 3. Unskilled and semi-skilled workers have strong union affiliation. Majority are affiliated to the Chemical, Energy, Paper, Printing, Wood and Allied Workers Union (CEPPWAWU). This affiliation increases the chance that workers will take part in strikes and can result in above-inflation wage increases.

Opportunities: 1. Bevcan: * Higher barriers to entry due to cost of plant and licencing agreements. * Secured long-term supply agreements with major customers (SABMiller) * The conversion from tinplate manufacturing to aluminium in order to align products with rising demand for aluminium cans. * Estimated cost is expected to be R600m over three years. 2. Nampak Glass: * Major customers include: SABMiller, Heineken and Coca Cola. * Currently controls 18% of the total South African glass market. And is the second operator in a two-player market. * The glass market poses significant barriers to entry. * The rebuild and expansion of one of the two furnaces has resulted in a 12% increase in capacity as well as a 29% increase in melting capacity. The group is deliberating over the addition of another furnace which would considerably boost the division’s capacity. 3. Africa: * Currently operates in 12 countries with 19 operations. * Angola, Nigeria, Kenya and Zambia are the most important regions for the group, contributing approximately 70% of African revenue. * The group follows big customers when they enter a new country which gives the potential operation at least one large customer in the region before it enters the market. * Less competition and higher margins are available from high growth sub-Saharan countries. * The canning line in Angola is now running at full capacity and Nampak are in discussions with major industry players to install a second line. Is biggest customer, Castel is continuing to grow market share in the region.

4. Nampak Tissue: * Even though the tissue division has not performed well in the most recent year, Nampak still is a leading player in the industry, with the division’s products generally commanding greater than 30% market share.

Threats: 1. Capacity investment by competitors, which will increase price competition and affect sales volumes of a particular division. 2. Raw material costs represent 54% of total group costs; therefore an increase in raw material prices will negatively affect group profit and margins. 3. Labour costs represent 26% of total group costs. Above-inflation wage increases will have a significant impact on group costs and may result in lay-offs and/or a reduction in profit. 4. Currency Volatility: * Of Nampak’s total turnover, 25% is export orientated either directly through the exporting to customers or indirectly through customer exports of finished goods. * Currency volatility generally results in some of the group’s product lines experiencing rising levels of imported competition particularly the flexible plastics, cartons & labels, sacks, beverage cans and corrugated product divisions. * A stronger currency generally negatively affects group revenue. 5. Deceleration in non-durable consumer goods growth. This is positively related to growth in disposable incomes and, in South Africa, the growth in public sector employment and increases in public sector wages.

Nampak has become a smaller, but better focused group with greater ability to deal with slow growth in a highly competitive environment. The group now offers highly defensive characteristics as well as evolving into a highly cash generative business. Nampak is currently trading on a forward PE of 13.27, a small premium to their 5-Year average PE of 13.05.