Lacklustre consumer demand, as well as a devaluation in the Angolan kwanza, the introduction and devaluation of the Zimbabwean RTGS dollar and movements of the rand against the dollar, are likely to impact negatively on JSE-listed packaging company Nampak’s results for the financial year to September 30.

In a voluntary trading update for the 11 months to August 31, published on Wednesday, the company said that, as a result of the currency movements, its capital expenditure for continuing operations for the full-year period, would likely be between R650-million and R750-million.

Nampak said its Bevcan South Africa volumes had been stronger than expected at the start of peak season owing to good market growth and higher allocations than expected from customers.

This partially offset expected market share losses to new entrants.

Revenue is expected to be lower year-on-year, but Bevcan South Africa’s trading profit is expected to be only marginally down owing to improved operational efficiencies, higher line speeds, stringent cost control and a keen focus on customer service to mitigate competitive pressures.

Overall, Nampak’s South African metals division results are expected to be moderately down, owing to Divfood having experienced a challenging year.

Food can volumes over the 11 months were down owing to a loss of a major customer in the vegetables category, which was partially offset by volume growth in meat, milk and good fish can volumes.

Diversified can volumes were slightly down on the prior year owing to lower demand from consumers, Nampak noted.

Owing to this, a review of the business is being undertaken to assess growth opportunities and further reduce costs to improve the profitability of this division.

Meanwhile, after a strong first quarter, Bevcan Angola’s volumes softened markedly for the remainder of the financial year and consequently revenue and trading profits are expected to be significantly lower year-on-year.

In response to the slowdown in demand, management acted decisively and retrenched 32% of employees.

The project to convert the steel plate line to aluminium is on track, on schedule and on budget, and cash extractions continue to be “satisfactory” with R1.6-billion being transferred for the period and 68% of rand equivalent cash balances hedged using dollar-linked kwanza bonds at the end of August.

Bevcan Nigeria, meanwhile, achieved strong revenue growth to date. Volume growth was driven by a higher market share and growth in can pack share has been sustained into the second half, while trading profits are expected to be flat for the year.

Capacity utilisation is now approaching the capacity of Line 1 and the decision to install a second line is expected in the coming financial year given the upside potential of this market, Nampak said on Wednesday.

The diversified metals packaging business of Nampak Nigeria’s revenue is expected to be slightly higher, boosted by foreign exchange movements, while demand remains constrained owing to cost and margin pressures.

The turnaround intervention at Nampak Kenya is now complete resulting in the retrenchment of 19% of staff. A decision has been taken to rationalise the Nampak Tanzania facility and the full complement of 75 employees will be retrenched.

Discussions with union bodies have already been concluded, Nampak said.

Nampak’s plastics division in South Africa, meanwhile, continued to experience lower sales volumes in a tough trading and economic environment in South Africa.

While volumes for the crates business continued to be subdued, Nampak said a significant contract for the supply of crates to a major soft drinks manufacturer for a period of three years was secured.

The upside potential of this operation, as a result of the new contract and a restructuring of the business to reduce labour cost, has resulted in the Crates and Drums businesses being withdrawn from a proposed disposal process, Nampak highlighted.

The liquid cartons business had a strong operating performance supported by improved demand for beverage cartons to package milk, fruit juice and sorghum beer.

Despite this, revenue and profit are expected to remain flat.

“Initiatives to capitalise on the global sentiment against single-use plastics have created much interest in cartons as a more recyclable and sustainable pack and we have seen positive sentiment among retailers regarding the benefits of recyclable cartons,” Nampak commented.

It added that this business was on a path for “strong and sustained growth in the coming years with exciting growth opportunities”.

The Zimbabwean operations CMB and Megapak improved profitability despite lower volumes in the second half.

Limited demand for certain products in a challenging economy and the unavailability of foreign exchange currency for raw material purchases will, however, limit the full-year results, the company lamented.

Plastics Europe continued to lose volumes and reported a loss for the period.

Touching on the paper division, Nampak said the demand for beverage cartons at Hunyani remained strong, and was supported by growth in exports to Malawi.

With Zimbabwe having had a very good tobacco harvest this year, strong demand remained for tobacco cases in both the local market and for export markets, Nampak said.

Sustained operational efficiencies also contributed to improved profitability for Hunyani but results will be impacted by hyperinflation accounting.

Cartons Nigeria, meanwhile, had a relatively weaker second half following its sale to A&R Packaging Group AB, which was concluded in April and has been submitted to local competition authorities for approvals with a decision expected in the near term.

While the revised strategy of pursuing new breweries yielded good results in Zambia, Nampak lamented that the global economic downturn and social economic issues “took its toll” on local breweries and demand was limited for the period.

The Malawian business, meanwhile, was extensively restructured and is now break-even after a reduction of 70% in the staff complement.

Commenting on its discontinuing operations, Nampak said that for glass, revenue for the period grew in the single digits, while volumes remained relatively flat and constrained by production output.

In terms of the potential disposal of the Nampak Glass business, Nampak said it had made significant progress in the negotiations and that the parties remain “fully committed” to concluding the transaction.

The transaction, if concluded, will be subject to competition authority approval and may have a material effect on the price of the company's securities.

KEY MARKETS

In South Africa difficult trading conditions for the majority of retailers and consumer goods companies continues.

Despite these conditions, Nampak said that the beverage can market continued to grow in excess of gross domestic product (GDP) growth, abating the impact of new entrants on Bevcan’s market share.

In Nigeria, growth slowed down somewhat to 1.9% in the second quarter of the year from 2.1% growth in the quarter before owing to sluggish performance in the non-oil sectors, despite the oil sector advancing 5.2% as oil production levels approached two-million barrels daily.

The Nigerian economy is forecast to grow to 3% in 2019, especially on the back of continued availability of foreign exchange currencies with the Naira stable around NGN360 to the dollar.

Additionally, an unconstrained liquidity ensured normal cash flow from Nampak’s operations in the country, the company commented.

Economic conditions, meanwhile, are said to be challenging in Angola, following the devaluation of the kwanza, which has resulted in a 1.2% contraction in GDP in 2018.

Angola’s GDP is estimated to have decreased by 0.4% in the first quarter of 2019 and double-digit production and consumer price inflation has prevailed while wage inflation has lagged.

This has led to continued weak demand in the beverage can market as consumers’ disposable income remains under pressure, Nampak said.

However, in line with trends that were seen in Nigeria following the devaluation of the naira, Nampak mentioned that it was expected that consumer demand would increase once wage inflation restored consumers’ spending power.

Meanwhile, Zimbabwe has negative GDP growth prospects for 2019, with economic growth expected to be restricted by foreign currency constraints and the ongoing drought.

Inflation, in both food and nonfood prices, is accelerating markedly. It increased from 31.3% in the last quarter of 2018 to 61% in the first quarter of this year, and has since shifted to an annualised rate of over 240% at the end of August, Nampak pointed out.

The inter-bank foreign exchange market was established in February 2019 and the RTGS dollar, which traded at RTGS$2.5:US$1 upon introduction, has been deemed the official currency of Zimbabwe.

However, it has devalued significantly and is converging towards the parallel market exchange rate since introduction, Nampak said. Further devaluations will also impact translated results from and financial position of operations in the country.