JSE-listed packaging company Nampak plans to dispose of its glass business, as market demand exceeds the operation’s capacity to supply products, given ongoing production limitations.
Progress within the business has not been as fast as desired and it is expected to make a loss for the half year to March 31, as a result of lower-than-targeted operational efficiencies resulting from insufficient technical skills, the company said in a trading update for the five months to February 28, on Thursday.
To ensure the long-term profitability of the glass business and to address the operational skills gap, Nampak’s board has resolved to approach packaging industry players to invite proposals for the sale of the glass business.
Exploratory discussions have been held with a number of strategic players with a formal corporate finance disposal process currently in progress, the company said.
Nampak’s share price fell by 8% following the announcement.
Meanwhile, while municipal supply of electricity remains very inconsistent, Nampak noted that stable electricity supply to the glass plant has been secured from the operation’s rotary uninterruptible power supply system for the second quarter of the financial year.
The business is being closely managed by the group executive responsible for glass, which is supported by external consultants and the company’s technical partner.
Nampak’s metals division, Bevcan South Africa has experienced volume growth in excess of gross domestic product (GDP) growth for the five months to February 28.
Should this trend continue on the back of improved consumer sentiment, the company noted on Thursday that any additional capacity by a new entrant in the beverage can market is likely to be absorbed in the medium term.
Discussions with a major customer regarding the renewal of an existing supply agreement that comes to an end on March 31 are in progress and the company expects that some volume will be allocated to the new entrant.
Bevcan Angola’s volumes have also shown growth for the period, as beverage can demand remains strong, the company added.
The decision to convert the tin plate line to aluminium is in abeyance pending sustained cash extraction and subject to the Angolan government agreeing to a kwanza dollar swop to fund the import capital equipment requirements of the expansion project.
Bevcan Nigeria has experienced a very robust recovery in demand, while DivFood is seeing improved volumes from fish sales on the back of the increase in imported frozen fish and a higher local allowable catch, Nampak stated.
General metals packaging in the rest of Africa is trading to expectations with modest growth in certain categories.
Further, Nampak’s plastics business in South Africa is seeing a moderate volume recovery in certain subcategories, the company noted, but performance for the five months under review has been impacted on by the loss of volume from lower tender allocations by a major customer in late 2017.
This volume loss, Nampak added, has been partially mitigated by higher capacity utilisation initiatives and strong water container demand throughout the country, especially in regions affected by the drought.
The operational turnaround is continuing and individual assets are being optimised, with further structural labour cost saving initiatives to be implemented in the second half of 2018 and in 2019, resulting in cost savings and improved profitability going forward.
Demand in Zimbabwe continued to grow, bolstered by new customers and increased market share, while operations in Europe progressed well. Nampak expects this business to return to profitability during the 2018 financial year, one year earlier than previously guided.
Meanwhile, the company further noted that demand in Zimbabwe for paper has slowed and continues to be impacted on by the lack of foreign currency.
Carton volumes in Nigeria were strong, while Zambia and Malawi continue to be affected by subdued carton demand owing to a change in the packaging strategy of a major customer.
This trend, however, is expected to be reversed in the second half of the current financial year as the sale of this major customer to a local brewer is finalised.
In terms of macroeconomic environments in key markets, Nampak highlighted that South Africa’s GDP growth for 2017 had been better than expected.
Renewed and improving consumer confidence this year, together with expected higher growth rates and a stronger rand, in line with historic trends, is expected to have a positive multiplier effect on packaging demand and drive growth in volume and overall performance for the year.
The Nigerian economy is also displaying an improvement, having emerged from a recession during 2017, while the Angolan government has introduced a series of foreign currency auctions in late 2017 to devalue the kwanza to stimulate liquidity.
Meanwhile, Nampak has revised its capital expenditure (capex) guidance for the full-year downwards, from the R1-billion to R1.2-billion guided at the end of the 2017 financial year, to closer to the R735-million capex invested in the 2017 financial year.
The company’s interim results will be published on May 30.