Can investors wrap up attractive longer-term returns from Bowler Metcalf (Bowcalf) and Astrapak, two of the JSE’s smaller packaging companies?
Both have undergone radical restructuring, which might warrant a closer look at the two counters despite the immediate prospects for the packaging sector looking a little tatty. The restructurings are not driven by economic realities alone, but both companies have also had to face up to increasing international competition, which has squeezed margins.
The restructurings are vastly different. Astrapak has been rapidly disposing of noncore operations as it focuses on plastic moulding and thermoforming technologies, mainly for the personal care, food and beverages markets.
It remains a substantial company (turnover is twice that of Bowcalf), though 33% of revenue is derived from a single customer in the toiletries and personal care market.
Bowcalf, on the other hand, has profited handsomely for more than two decades by stoically sticking to its specialist plastic packaging offering to the personal care and food/beverages sectors. The company’s restructuring involves sharpening this focus by merging its soft-drink bottling subsidiary, Quality Beverages, into a new, bigger and separately managed entity called SoftBev. The company holds a stake of roughly 40% in SoftBev, which is expected to raise fresh funding by listing on the JSE next year.
The other critical difference is that Bowler’s restructuring has already achieved results, while Astrapak, though showing a R6m profit from continuing operations in the half-year to end August, is still building momentum after some large losses.
At a recent investor presentation, Astrapak CEO Robin Moore stressed the restructuring process was "never to see how small we could get Astrapak without losing profitability". Looking away from the income statement, Astrapak has done well to drag gearing down from an uncomfortably tight 60% in financial 2012 to just 6%.
Astrapak’s balance sheet shows there are still assets worth about R500m held for sale. Moore says the intrinsic value of these businesses is better than the share price reflects.
There will also be further cash inflows in the second half of 2016 as more of these noncore assets are sold off. Astrapak is likely to finish this financial year in an ungeared position.
The key to shifting bottom line will be bulking up Astrapak’s operating margin. Moore indicates that around R30m in annual excess corporate costs will be steadily eliminated through financial 2016 and 2017.
This may help Astrapak shift its operating margin from just under 9% at the end of the interim period towards 12% at the end of February 2017.
Bowcalf, sitting with net cash of around R140m, finished its year to end June with operating margins around 18%.
The company successfully rebuilt its customer base after relinquishing a key long-term contract where the price was no longer viable.
This contract has been taken up by Astrapak, though it seems Bowcalf is still servicing parts of it in what appears to be a prolonged handover.
Bowcalf CEO Friedel Sass says the rises of 18% in revenue and 30% in earnings respectively for Bowler Plastics were helped by offloading its softdrink bottling operations and by new business growth. He says Bowler has seen "a significant growth in customer base over the last 18 months", winning long-term contracts of more than R450m.
Investors looking at a recovering packaging sector have a tough decision in selecting between an Astrapak recovery and an extended profit growth run for Bowcalf. Astrapak looks to appeal more to the deep value investors, trading at less than half its intrinsic net asset value of 851c (and at a modest forward earnings multiple if margins can be fattened to 12% in financial 2017). Of course, if Astrapak’s share price continues to offer a large discount on NAV then there must be a real possibility of corporate action.
Bowcalf will appeal more to fans of steady growth and steady dividends — and, in this regard, the company’s enviable track record of profit generation since listing in 1987 can’t be overlooked. In addition, anyone visiting the austere premises that masquerade as a head office in Ottery will know that there are few businesses on the JSE that are run leaner and meaner.
Bowcalf trades on a trailing earnings multiple of 10 times, but also offers a potentially attractive yield with 41c/share being paid out in the past financial year. Consideration should also be given to value to be unlocked by the listing and possible unbundling of SoftBev, which recently added the Pepsi and Capri-Sonne contracts to its core Jive and Coo-ee brand offering.
This may sound like a cop-out, but a combination of a rebounding Astrapak and a reliable Bowcalf might stoutly reinforce a small cap investment portfolio in the years ahead.