New Eskom CEO Andre de Ruyter has been burdened with the hopes of a nation long tired of rolling blackouts and high annual tariff increases. With so much at stake, it’s not surprising his track record is being scrutinised in great detail. Sources inside the group whisper of the great job at Sasol when charged with turning around one of the energy group’s problem children. But that success was not replicated after he became CEO of troubled packaging group Nampak in 2014 – long-suffering shareholders experiencing a 90% meltdown in the value of their investment while De Ruyter was at the helm. Chris Logan of Opportune Investments, who has been jousting with the Nampak board of directors for years, posed some tough questions at yesterday’s Annual General Meeting. Logan shares them with us – and in the wake of the disaster De Ruyter left behind, applies his mind to the obvious question of whether Eskom’s new CEO is the right person for his new hot seat. – Alec Hogg
Chris Logan joins us after a pretty eventful AGM with Nampak yesterday. You dialled in to the AGM which started at 2pm and had some extremely pointed questions. Were they gentlemanly in their response to you?
___STEADY_PAYWALL___
They definitely were. They engaged very well on the tough line of questioning I put to them, the no holds barred questions. The chairman Peter Surgey, Simon Ridley who’s the new head of audit and risk, the CFO and the new CEO.
This is the company that – as you kicked off with in the research notes that you sent me – has massively destroyed market value. If you’d been a shareholder in this company over the last 10 years you would have seen the decline in the value of your share by around 90%?
Just over the last five years alone, it’s lost 90%. So at the end of the 2014 financial year, the share price was R41.13 and today it’s under R4.
Yes R3.96 today as we look at it. So it’s a negative 10 bagger and more. But how do they explain this?
With difficulty. There’ve been two huge factors which have destroyed massive value there. That’s been their foray into Angola/Nigeria which happened 6 or 7 years ago. Around about 2011 they made that decision when the Africa Rising narrative held sway. At that stage – 2011 – Nampak only had something like R12m of net debt, their net debt now is about R6bn. So a lot of that was to expand into Angola and Nigeria and then of course the other thing has been their purchase of the glass business which was a diabolical failure. They were in partnership with the German operator called Wiegand-Glas – very skilled in glass – and they bought them out about 6 or 7 years ago. They’ve just sold it now after writing it down substantially and admitting that they didn’t have the expertise. The performance of the share has been diabolical. I would like to point out it’s not just how badly Nampak has done, its well worth looking globally at a company called Ball Corp. They’re the largest manufacturer of beverage cans in the world. It’s been an exemplary performer and one of the reasons why it’s worthwhile looking at it is the speculation that potentially Ball Corporation or the other large beverage can manufacture Crown, could make a bid for Nampak or its beverage can operations. Over the last 25 years, I think Ball corp is up well over 200 times in Rand value and Nampak down substantially more. It’s one of the most amazing comparatives.
And all at the door of capital allocation or in this case mis-allocation.
That’s a huge symptom. I would say the nub of it is, in 1992 Ball corp aligned their incentives with something called Economic Value Added. Ball was a diversified conglomerate. It was even more diversified than Nampak is – and they weren’t making their cost to capital – but they then aligned with the Economic Value Added incentives.
For the management that is?
Yes, and it transformed the company. The company sold off its glass business, they were very unemotional in capital allocation decisions and it’s just gone from strength to strength. It is a remarkable company Ball Corp. They’re also leaders in the whole environment thing, they sponsored the recent World Ocean Summit and they’re into sustainable packaging. Listening to them is like listening to the gospel on how to run a company.
EVA, Joel Stern started that many many years ago. What about Nampak, do they actually embrace EVA? Have they ever even considered using it given the mess that they’ve made?
I corresponded with them extensively on EVA, I had a couple of one on ones with Peter the chairman and Andre on it,
Andre de Ruyter – we need to talk about him in a moment because everyone’s hoping that he’s going to get Eskom right – what was their response to the EVA idea?
The chairman said no. Takes three years to implement, so I had a bit of an axe to grind yesterday on them shooting that down, because that would have transformed them and put them on the right path. To their credit they have improved the incentives somewhat but they need to make the big leap. We started seeing some companies being more open to this but Nampak really needs to move.
Just before we move off that subject, how well did the managers do – given that shareholders have had their wealth destroyed by investing in this company – did the managers also take a bath?
No. I showed a table that had the last 5 years remuneration given to the executive directors, the group EXCO and the non execs, has been flat whereas the share price lost 90% of its value. So that just illustrates – in no uncertain terms – the misalignment.
Chris, what about Andre De Ruyter. He has been boomed as the great hope for Eskom. He’s going to turn things around. From what’s happened at Nampak – under his guidance – doesn’t really fill one with a lot of confidence.
Yeah. I think one needs to be careful in how we approach that. As I have said, the seeds of this destruction – this terrible destruction which has occurred at Nampak – were already put in place by Andre’s predecessor and the previous board. So they had already gone into Angola and Nigeria, they had already bought out their 50% in the glass business, Nampak was already a dinosaur. It was the last diversified packaging company in the world. So he was dealt a horrible hand. The question then is could he have done better? And that’s very difficult to answer, particularly with a board who I don’t think were at all astute. There were probably a lot of political appointees and there was also probably the need to preserve the old Nampak empire. Where they were involved in how many countries and packaging, glass, paper every possible thing. So I think Andre’s strength is a high EI, he got some things done, but when you look at the numbers, it’s 90% down.
Has it made the turnaround though before he left to go to Eskom? Would you say that Nampak today – despite this massive destruction of value and you make the point that the market caps about R2.5bn today and they’ve put R11.5b into capital expenditure in the last 10 years – did he at least make the company into a sustainable business today before he went off to Eskom?
I certainly think you can credit him with quite a few improvements. They’ve now got a capital allocation committee, they’ve sold off a lot of diversified stuff they finally sold off glass and other bits and pieces – plastic in the UK – which have been a drag. So he was certainly moving in the right direction during his tenure. But the problems are immense. They’ve got dollar denominated debt. I think something like 90% of the debt is dollar denominated. A lot of that’s being serviced from weak geographies like Angola, Nigeria, Zimbabwe and even South Africa. It’s a big ask to fix. The other big thing is Nampak used to have 100% of the beverage can market in SA. There are now two competitors and they’ve already taken something like 20% market share. So you could probably argue that what he is faced with at Eskom, is easier to deal with.
Well, he does have Euro denominated debt at Eskom but it might just turn out to be the South African taxpayers benefit of the experience that he had which was paid for by Nampak shareholders.
Yes let’s hope so. Eskom as I’ve shared with you, could turn things around very quickly if they followed Treasury suggestion of selling off coal power stations, but anyway that’s a separate subject but Nampak is complex. When you look at it after 2 or 3 days you get the feeling that to really understand what’s going on, you need another 2 weeks of work. And what’s the point, it’s low return on effort.
So when you have a look at this and there’s some pretty high powered guys there – Peter Surgey, Simon Ridley who used to be the financial director – both ABSA and then Standard Bank on the board – it’s not that they lacked brainpower. What is their strategy? What are they likely to be doing in the future with this business?
Interesting enough, both Peter and Simon have bought shares lately – in December and at yesterday’s AGM they said they would buy more so it’s a good sign – but there’s a hell of a lot to do. They need basic disciplines, capital allocation decisions, aligned incentives. The biggest thing from my perspective is that if they just align the incentives you start moving in the right direction and they really need to move – you can imagine with all the debt and the weak economies – so that’s my message to them. Obviously when you’ve got big shareholders, you’re supporting the status quo – like what happened at Tongaat – change doesn’t happen easily, it generally requires a catastrophe.
A burning deck as it were before people get their buts a little bit hot and move in the right direction. Who are those major shareholders?
The biggest one I think is Allan Gray at about 28% and they’ve been in there a long time, the PIC is about 21%. Investec was there but I noticed they sold out or had been selling, so yeah, it’s a tough ask to get Allan Gray or the PIC to move. They’re sitting in Big Head Offices.
Chris, the net asset value and bargain hunters will be saying but there’s a net asset value here of nearly R14 a share, the shares are trading at under R4, it’s got to be offering value when you look at it from that basis. Just buy the thing, liquidate it and it’s worth R10 a share more than than the market is valuing it at. Is it as simple as that?
No I don’t think so. Both in the auditor’s report and the directors report, the first thing on the audit report is this discrepancy between the NAV and the share price and at the stage of the auditor’s report – I think the share price was north of R9 – they note the potential for big impairments in this discrepancy which – as I pointed out – is far worse since the year end, so there are likely to be big impairments. NAV needs decent returns to sustain it and they don’t have decent returns. Their assets are earning low returns. You really need a radical transformation. You can imagine how difficult that is to accomplish when you’ve gone from having 100% market share in your beverage can market – which was the real money spinner – to having 2 competitors starting to eat your lunch. So they are not short fo challengers and to blindly look at NAV – the discount – I think is dangerous.
So interesting because the parallels with Eskom are stark. Eskom needs a radical transformation as well. Andre de Ruyter who’s the CEO there, has got other resistance against doing that – being a state owned enterprise – and he wasn’t in favour of radical transformation clearly within Nampak or, even if he was in favour, he wasn’t able to do it. So again I get back to that question of Eskom. Can he really make a big difference there?
These are great questions. The one thing I would say it does look as if the Eskom debate is shifting quite fast. I see in today’s paper Cosatu has now backed out of this idea in getting the PIC to finance Eskom. There are some game changing ideas like the ideas put forward by Treasury in August 2019, but yes any radical plan needs political backing so it’s tightly balanced. You’ve got to give Andre credit for putting his hat in the ring and climbing in the ring. Apparently he put his name forward for Eskom CEO 3 years ago – it was in the Sunday Times.
Oh yes I saw that. He clearly knew 3 years ago that Nampak wasn’t exactly a silk purse.
Right from the outset, he had a baptism of fire into Nampak. It was at the time when they couldn’t repatriate money out of Angola and Nigeria and not just that, they had to finance those countries through dollar debt. He had a baptism of fire. So yea, he’s not short of going into tough situations.
A man with plenty of self confidence, Andre de Ruyter and thats Chris Logan from Opportune Investments who is looking into Nampak now. You might recall that Chris was on the Tongaat story long before the problems began. Maybe now these companies will start listening to him little more closely.
