The Finance Ghost: Nampak and EOH face debt woes, Famous Brands embraces healthy eating

When a company gets itself into serious balance sheet troubles, the road to redemption is paved with a great deal of pain.

Nampak is a balance sheet offender that has tried hard to turn the corner. The share price is down more than 80% in the past five years and has only returned 6.6% in the past year. If you bought in the depths of July 2021, you’ve done well with a 64% gain. Timing is everything in speculative plays.

Nampak lost nearly 18% in value from Monday to Thursday last week. A trading update told a decent story around volume growth and a rebound in important business units, but the market focused on the balance sheet worries. The company needs to settle R1-billion of interest-bearing debt by 30 September and funders will assess the situation on 30 June. There are significant pressures on working capital at a time of rising costs, so that is sucking up cash. The sale of noncore assets isn’t showing much progress. The company also warned that repatriating cash from Nigeria is getting tighter based on foreign currency availability.

The market took one look at this and clearly got spooked about the risk of a rights issue, sending Nampak’s share price down a hole.

Speaking of holes, the EOH share price is still at the bottom of a very deep hole. Having lost 96% of its value in the past five years, EOH is down more than 21% in the past year and 15% year-to-date. Much like Nampak, the company is under serious pressure to solve a debt problem. A bridge facility of R1.2-billion is repayable in October and pending proceeds from the sale of IP division businesses will raise R417-million (before transaction fees). The company rounds the problem off to R750-million and there aren’t many ways left to deal with it.

Although EOH is now profitable (a significant achievement), there aren’t any obvious businesses left to sell. With a market cap of about R1-billion and a R750-million debt problem to fix, many investors have already run for the exit out of fear of a potential highly dilutive rights offer.

Famous Brands eats its vegetables

Remember Wakaberry? Perhaps you don’t. That tells you everything you need to know about how things went for Famous Brands the last time it bought into a local hyped-up trend. Still, that’s been less painful for shareholders than an international disaster like Gourmet Burger Kitchen.

Famous Brands desperately needs a return to form. If consumer demand for plant-based eating continues to grow, then perhaps the company will find more success with its latest acquisition. With a 51% stake in Lexi’s Healthy Eatery, Famous Brands is betting that South Africa is ready for a franchise format that is (almost) vegan.

Spur has proven with RocoMamas that rapid scaling of new restaurant formats is still possible in South Africa. Famous Brands needs to deliver a similar story here. The company has learnt that scaling full-service restaurants isn’t easy (with tashas as an example of a poor strategic fit that Famous Brands exited), so the announcement does highlight that Lexi’s can work as a quick-service restaurant format.

Perhaps there is hope for shareholders after Famous Brands shed 18% of its value this year and nearly 58% over the past five years.

Industrials are shining

KAP updated the market on the eight-month period to 28 February 2022. Other than the Restonic business, the narrative is positive across all divisions. With strong demand and improved prices, the benefits of operating leverage play out in businesses like KAP. Although there are still a few months left in the financial year, KAP has already indicated that headline earnings per share (HEPS) should be at least 50% higher for the full financial year.

Barloworld is down more than 24% this year thanks to its significant exposure to Russia. Equipment Eurasia had a record order book at the end of February, but the war and related sanctions have obviously derailed the story considerably. The rest of the business is doing well, especially Ingrain, with revenue growth of 48.1% in the five months to 28 February. The car rental business is up 17% in operating profit compared with pre-Covid levels, a direct result of an effort to slim down fleets and drive utilisation rates. The balance sheet is strong and the market rewarded Barloworld with a 9% rally in response to this update.

Bell Equipment also deserves a mention here, with 20% revenue growth in 2021 and a massive jump in operating profit. There are working capital pressures to keep an eye on. The NAV is R40.38 so a share price of under R15 is a substantial discount to net asset value. HEPS in 2021 was 294 cents. Bell is the type of stock that value investors enjoy. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.