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Not the fire sale the market believes

Nampak Ltd is moving forward with the sale of under-performing and non-core assets following the dramatic 39% decline in its headline earnings per share. Some have suggested that this is a fire-sale by a panicked management which only recently fended off a partial takeover by Bidvest. 

Africa’s second largest packaging producer does have good assets. The company recently invested nearly R100-million in the printing capability and capacity of its cartons and labels divisions. Hardly the move of a management engaged in a fire-sale.
Nampak should, however, be looked at from its operating performance. The management is not being totally transparent about the true profitability of the company. It scared off Bidvest by releasing a profit warning last October. The warning, that earnings would fall 60-80 per cent, turned out to be way to pessimistic. In apparently unrelated incidents, a non-executive of the audit committee resigned a month later, followed by the CFO who resigned three months later.
So, is the company in a bad state or not? Looking deeper into the results, one can see that the problem was due to a loss on the fair value of financial instruments which were compared to a gain and tax provision write-back the previous year. This is not an operating issues and as such a distraction. More importantly, the results show revenue up 14%. 
The same results show the company successfully managed to pass on raw material cost increases. That is a sign of strength. It also reported good results in its African operations to outside of South Africa. Nampak has ninety factories in twelve African countries. Most of these are still growing GDP, unlike economies in the rest of the world. Despite the tough economic conditions, volumes in its main market, South Africa, remain steady. At the same time, additional costs associated with the late commissioning of the Rosslyn paper mill negated what would otherwise have been a good improvement in trading income.
The current P/E of 11.02 is close to the bottom of its five year range. The Price/Cash Flow, which could be considered more reliable in this instance, is 4.27. This is the lowest it has been for five years and half what it was in 2006.  Looks like the only fire-sale here is the stock itself.  Selling of non-core activities and under-performing assets, for the right price, will make the company stronger, not weaker.

Disclosure: Daniel Broby holds no long or short positions in NamPak.

Silk Invest holds a long position in Nampak in its Silk Africa Lions fund.