Bowler Metcalf faces tough prospects

Until now Bowcalf, which has a profit growth record unmatched by any other small-cap company over the past quarter century, has not needed to reach out to investors. In previous years its solid numbers did the talking.

But the year to June 2012 - the first year without former financial director and managing director Michael Brain - was an absolute shocker by Bowcalf's high operational standards.

Investors clearly needed placating, especially a handful of institutional fund managers who clung to their scrip even when Brain jettisoned the bulk of his shareholding at the end of last year.

Earnings slipped 26% to 70c a share, but steady cash flows and a strong balance sheet (showing net cash of R43m) hiked the dividend a reassuring 18% to 36c a share.

What will probably worry investors, though, is the pressure on the central plastic packaging operation. Packaging turnover was up 14%, thanks largely to a new skin-care product launch by Johnson & Johnson, but operating profits were squeezed down over 10% to R47,4m.

Bowcalf chief executive Friedel Sass listed a number of factors for the margin squeeze. Most notable were prolonged industrial action, which shaved off R3m in profit and even caused the company to operate at a loss briefly for the first time in its history and extremely volatile raw material prices.

More disturbing as longer-term trends were the admissions by Sass regarding the general operating environment, particularly the 24% hike in electricity prices (10% of Bowcalf's costs) and wage settlements above inflation. "We won't come close to recovering these costs in the current market."

Adding to Bowcalf's pricing woes was another unsettling trend that Sass terms "increasing multinational dominance", noting that large international players were dictating terms. "They say 2% and many packaging players accept this price increase. We've dropped 30% in price to keep certain business."

With these challenges in mind, one might be forgiven for thinking Bowcalf has acted over-confidently in upping the dividend payout.

Sass, though, believes the plastic packaging sector is experiencing a moment of redefinition - a trend that Bowcalf can cash in on in the years ahead.

He says the company aims to spend around R50m on upgrading production facilities to boost efficiencies (through new technologies and new capacity) and capture new markets. Bowcalf is in the process of installing solar panels to reduce its electricity consumption and has already expanded the factory at its Cape Town packaging plant.

Sass also believes Bowcalf's focus on the upper end of the consumer market (skin care, shampoo, disinfectant and so on for blue-chip clients) can be expanded into a "massive middle market that is opening up".

What may give investors sleepless nights, though, is the soft-drink bottling division, Quality Beverages. Its profits dried up to R1,5m (2011: R15m). The division now generates more turnover (R350m) than packaging (R295m), but margins on the filling operations are much thinner.

Sass says the core Western Cape market is solidly profitable and shows further market share gains for Quality Beverages' brands Jive and Planet.

But expansion into the Gauteng market is proving tough, and it might be worrying that investors could not force a prediction from executives of the break-even date in South Africa's richest province.

Sass believes break-even in Gauteng will follow only when a second bottling operation in the Boksburg production plant has been commissioned. "We'll get a feeling for where the break-even point is only after the [summer] season. It took Quality Beverages' Western Cape operation the best part of 12 years to become viable."

Bowcalf, underpinned by a 535c a share net asset value, might still appeal to value investors and yield seekers at current levels. For the growth-inclined investor it's too tough to call the company now.

Nampak, not too long ago the laggard in the packaging sector, looks to be in a far better space right now.

Source: Financial Mail via I-NET Bridge