Announcements

Nampak placed on positive outlook

GCR has confirmed Nampak Limited’s (“Nampak”) domestic ZAR currency ratings of A- (single A) and A1- (single A one minus) for the long and short term respectively. In light of the turnaround achieved through the recent streamlining of the business, stronger credit protection factors and conservative gearing metrics going forward, the ratings were placed on positive outlook.

Following constrained performance over a ten-year period, Nampak’s divestiture of smaller, mostly loss making operations, coupled with the restructuring of key processes (particularly in the corrugated business), saw a significant turnaround in pre-tax earnings in F10. However, the reviewed strategy translated to a decline in turnover, a trend that is likely to persist in the medium term as the group resizes.

Strong cash generation, along with the aforementioned divestitures and consecutive working capital releases, saw operating cash flows peak at a five year high of R2.1bn in F10 (F09: R1.4bn). As such, gearing levels fell well within forecasts at FYE10. Specifically, net gearing improved to 34% at FYE10 (FYE09: 61%), falling below the internal target of 50% and the 45% forecast. Rebounding earnings saw net debt to EBITDA decrease to 79% (FYE09: 156%), compared to an initial projection of 120%. Debt serviceability similarly strengthened with cash flow coverage of total borrowings rising to 86% (FYE09: 36%), while net interest coverage rose to 7.8x (FYE09: 3.5x). Notwithstanding a 29% decline in liquid funds, cash coverage of current debt firmed to a review high of 0.9x as at FYE10 (FYE09: 0.6x). While management forecasts an ungeared balance sheet by FYE11, the group would consider reverting to moderate gearing levels where investment opportunities aligned with the reviewed strategy arise.

Going forward, management remains committed to the restructuring of the group, with a view to concentrating on profitable segments, cost cutting, and conserving cash. As such, a smaller, more cohesive business is expected to emerge in the medium term, with the focus on achieving sustainable profitability, improving RoaE and the dividend yield. In keeping with this resolution, the top line is expected to shrink further, as ancillary operations are either mothballed or disposed of. However, with market conditions in key areaa still subdued, some divestitures will be delayed until the environment improves. This will constrain margin improvement in the year ahead.

Patricia Zvarayi.

https://globalratings.net/uploads/files/GCRinsights_March_20112.pdf

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