Packaging companies in for the taking

Not even a recession could stop Transpaco, which in its three financial years to June 2011 grew headline earnings per share (HEPS) by a whopping total of 140%. Playing a big role in Transpaco's success has been the building of dominant positions in a number of flexible plastic and cardboard packaging sectors. For example, Transpaco CEO Philip Abelheim says the firm is now the largest supplier of plastic bags to the retail industry and the largest supplier of cardboard tubular cores and tubes, a product used widely by paper and plastic product manufacturers.

Transpaco's strategy, Abelheim says, is to supplement organic growth with acquisitions that fit into existing operations. Two of these acquisitions have been from packaging giant Nampak

First was Nampak's plastic bag unit, which Transpaco snapped up in 2006. It followed this in November last year with the acquisition of Nampak's Disaki tubes and cores unit for R42,6m. "The bag unit took 18 months to bed down but Disaki did well for us from day one," says Abelheim.

Over the past three years Transpaco has been the share to beat in the packaging sector, with its share price rising 150%. Close on its heels, with its share price up 125%, was Bowler Metcalf, a small-cap company with a superb record in rigid plastic packaging and a successful diversification into soft drinks. Share prices of the far larger Nampak and Astrapak rose 35% over the same period.

Transpaco and Bowler Metcalf have proved to be top operators in their respective niche markets. Both also offer attractive dividend yields - 5% and 3,6%, respectively - backed by robust balance sheets and strong cash flows. But for investors looking for shares with recovery and, ultimately, solid growth prospects, Nampak and Astrapak could fit the bill.

After many years of dismal performance, Nampak appears to have turned the corner under the leadership of Andrew Marshall, CEO since late 2008. A key part of his turnaround strategy has been to sell or close underperforming units. In the six months to March 2011 Nampak reported R736m in proceeds from the sale of noncore units and a marked improvement in performance metrics. These included HEPS which were up 28% compared with the first half of 2009/2010, return on equity which lifted from 17% to 23% and net debt which fell from 50% to 23% of equity.

Nampak is looking to Africa to drive growth. Already active in 12 sub-Saharan countries outside SA, the company aims to grow sales in the region from 8% to 20% of total sales by 2020. The consensus forecast of analysts polled by I-Net is that Nampak's HEPS will rise 18,6% in its year to September 2011 and at an average of 14,5%/year over the following two years.

For the less risk-averse looking for potentially stronger recovery potential, Astrapak could hold more appeal. Hit by an aggressive acquisition strategy that backfired, the flexible and rigid plastic packaging specialist's HEPS in its year to February 2011 were a third lower than they were four years earlier. Marco Baglione, Astrapak CEO since June 2008, says drastic restructuring is over and he expects benefits will be seen as early as the first half of 2011/2012.

But whether any of the four packaging shares is a roaring buy at present seems unlikely in an economy in which the source of their growth, consumer spending, is set to come under more pressure.

Source: Financial Mail