The JSE share price of Nampak fell by more than 15% on January 30, after the company revealed to shareholders that it was still planning a significant rights offer, although lower than the previously planned R2-billion.

In a business update and trading statement, the company said it had achieved revenue growth in excess of 20% for the first quarter relative to the comparative period last year, supported by increases across most of the group's beverage can businesses and a moderate recovery at DivFood.

Following discussions with stakeholders regarding the company’s plan to proceed with a rights offer, it has provided a performance update for the first three months of the financial year ending September 30, 2023, as well as details of the turnaround plans for the underperforming businesses and operational processes implemented and to be implemented.

Trading profit growth was higher than revenue growth owing to the partial recovery of higher cash transfer costs, improving supply chains and continued improvements in internal efficiencies in the Metals and Paper divisions.

However, foreign exchange losses recognised through increased transfers of cash from Angola and Nigeria and the impact of the devaluation of the respective currencies on the translation of monetary items significantly impacted operating profit before net impairments.

Although significant cash transfers were achieved in 2022 financial year, the majority of the related foreign exchange losses were incurred in the second half of the 2022 financial year.

Accordingly, the comparative first-quarter results have been materially impacted by the acceleration of cash transfers and the extraction of cash balances built up during periods of foreign currency unavailability.

The transfer of foreign exchange remains challenging but cash extracted is sufficient to fund raw material requirements, Nampak says.

Higher debt levels, coupled with increased interest rates and a weaker rand:dollar exchange rate resulted in significantly higher net finance costs. The group operated within the stipulated debt covenant thresholds as at December 31, 2022.

A higher effective tax rate, primarily owing to the effect of the weakening Kwanza on net deferred tax balances in Bevcan Angola, negatively impacted reported profitability.

OPERATIONAL PERFORMANCE

Demand in the South African beverage can market remained strong during the period on the back of the strong volume growth experienced during the 2022 financial year, resulting in positive volume growth for the period.

The demand for large can sizes remained strong resulting in full capacity use for these lines at the Bevcan operations.

The continued focus on improving operational efficiencies delivered positive results and enhanced operational performance.

Trading results at DivFood South Africa improved from a loss in the comparative period to a small trading profit.

Despite still being in the early stages of the DivFood turnaround strategy, the results were supported by improved operational performance at both the Paarl and Epping operations, on the back of some initial challenges experienced in the 2022 financial year, when manufacturing equipment was relocated from Vanderbijlpark.

A more stable import supply chain resulted in improved raw material availability.

A reduction in dollar tinplate pricing for new orders should bring much-needed cost relief to brand owners once the anticipated lower cost tinplate finds its way into products being supplied to customers, Nampak avers.

Although imported tinplate forms part of a supply chain with very long lead times, the commodity price reduction is expected to reduce the net working capital investment in DivFood over the coming months.

Fish can demand to date has been strong, as a result of a stable import supply of frozen fish. However, this was offset by lower market demand in the vegetable and meat categories, resulting from depressed consumer spending.

Demand for most diversified products was noted as disappointing owing to a slow start to the insecticide season and consumers having less disposable income to spend on personal and homecare products.

Shoe polish can sales bucked the trend and remained strong.

Demand from the wine and spirits industries for caps and closures remained stable.

For plastic, raw material cost increases necessitated product pricing increases to the market. Demand for certain products was negatively impacted by higher prices in a weak disposable income environment.

Tube sales improved and plastic closures sales were stable, although demand for drums, crates and bottles was lower.

Nampak is engaging with all affected stakeholders to enable a smooth transition process on the exit of the Crates business as well as site closures in various parts of the country to reduce costs and return the business to an acceptable level of profitability.

For paper, the demand for conical carton volumes in South Africa reduced, following strong demand in the 2022 financial year.

The demand for PurePak cartons was stable, despite the persistence of weak economic conditions and operational challenges at its customers.

Loadshedding remains a concern across the South African operations, especially the higher levels. The increasing frequency of loadshedding, if sustained in the medium term, may require additional investment in alternative supply systems.

TURNAROUND

Nampak reviews the group’s strategy on a continuous basis. A key focus over the last three years has been the strengthening of the group's liquidity position, capital structure and optimising operational performance.

In September 2022, the board approved updated turnaround plans, which include operational measures to improve its liquidity position.

Since announcing in December 2022 an intention to proceed with a proposed rights offer, Nampak says meaningful progress has been made in delivering on the company’s strategy.

The structural disparities in the payment terms and credit limits in place with certain major suppliers and customers have, where possible, been addressed and negotiations with other suppliers and customers are ongoing.

To date, these efforts have yielded an estimated yearly working capital benefit and liquidity improvement in excess of R500-million.

In addition, the group continues to make progress on several strategic initiatives which are focused on turning around underperforming businesses, thereby increasing Nampak’s cash flow generation.

DIVESTITURES

Having performed a detailed portfolio assessment, the group has started the divestment from assets or businesses in the rest of Africa that are either unprofitable and/or subscale.

The aggregate operating assets value (excluding working capital) of these businesses is R95-million.

Nampak expects to conclude most of these disposals during the next twelve months.

The working capital cycle has been adversely affected by global externalities, resulting in the group having to maintain higher inventory levels at increased cost, placing additional strain on its cash resources.

In 2022, Nampak faced heightened commodity prices and volatility as well as increasing global interest rates. This exacerbated the cost of inventory, resulting in further absorption of working capital.

FUNDING PACKAGE

Nampak raised an unsecured revolving credit facility and term loans in 2018 with components which were to mature in September 2022 and September 2023 respectively, in addition to the remaining final portion of US private placement funding, which matures on May 28, 2023.

Over the last three years, numerous covenant relaxations and extensions of maturity dates have been granted by the lenders primarily owing to the impacts of a weakening rand:dollar exchange rate and the Covid-19 pandemic, complied with throughout the period.

At the end of the 2022 financial year, the maturity date of the funding package was extended to December 31, 2023, conditional on Nampak launching a rights offer to raise minimum net proceeds of R1.35-billion, with such proceeds to be applied to reducing debt.

The group has appointed Metis Strategic Advisors to advise the board and negotiate an equitable new funding package with the lenders.

The group’s lenders are also in the process of appointing debt advisers to facilitate the process of reaching consensus between all the group’s lenders in determining the participants, appropriate size and terms of the new funding package.

Shareholders holding at least 30% of Nampak's ordinary shares indicated their requirement for the group to first finalise the new funding package prior to launching the rights offer.

The Nampak board has resolved not to launch the proposed rights offer until such time as the new funding package has been secured and approved by both the credit committees of the lenders and the Nampak board.