NAMPAK Zimbabwe's top line was 17% lower in the first half of the financial year 2025 because of a 30% sales volumes decline in the Hunyani strategic business unit (SBU) as well as 6% and 5% less sales volumes in Megapak and CarnaudMetalBox, respectively.
The Hunyani SBU was affected by residual effects of the El Nino and product substitution by farmers while increased competition, loadshedding, and tight monetary policy weighed on the plastics and metals divisions.
In addition, the ZiG's stable run over the period watered down exchange gains.
These collectively led to a percentage point decrease in the net margin and a 7% decline in the bottom line. Collections from receivables, operating cash flows drive total asset value growth.
The value of total assets was marginally higher because of capital expenditure and increased inventories which were funded by cash collected from receivables and operating cashflows.
The group remains debt-free and continues to invest in capital expenditure using internally generated funds, hence no interim dividend was declared.
Forecasts: Tight monetary policy
Despite a 33% increase in tobacco sold so far, Nampak's Hunyani strategic business unit is expected to register less-than-commensurate growth in sales volumes because of a substitution effect.
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We expect other SBUs to experience less production downtime in the second half of financial year 2025 because of improved electricity supply.
Margins are also anticipated to somewhat recover because of cheaper energy costs.
However, the extent of this recovery will be limited by the current tight monetary policy and global supply disruptions.
Valuation: Revising FY25 price target down
We revise our FY25 price target for Nampak Zimbabwe downwards to US4,22c on account of weaker margins.
However, we maintain our BUY recommendation because of continued price weakness and ongoing M&A activity.
The valuation was largely based on a relative PER valuation. Regional peers were used to generate forward-looking multiples, and these were adjusted for differences in country risk. In addition, a liquidity risk discount was applied as a reflection of the counter's low free float shares and tight ZiG liquidity.
We also note M&A activity which will likely result in a mandatory offer to minorities at a price higher than our price target.
Investment thesis
Increased tobacco hectarage in the current market season has resulted in a 33% increase in tobacco sold to 23 million kilogrammes, but Nampak Zimbabwe will likely register less-than-commensurate growth because of a farmers self-manufacturing of packaging material driving a substitution effect.
While we anticipate a stronger second-half performance in Nampak's Hunyani SBU's sales, we think that it will fall short of our previous expectations.
We expect other SBUs to experience less production downtime in the second half of FY25 because of improved electricity supply from the Kariba hydroelectric stations.
Margins are also anticipated to somewhat recover because of cheaper energy costs driven by better electricity supply and lower fuel costs.
However, the extent of this recovery to pre-2024 levels will be limited by the current tight monetary policy and pervasive global supply disruptions.
- This article was written by Morgan & Co, a securities firm for a new era, whose local knowledge and expertise is twinned with international experience to grow the Zimbabwean capital markets.
