Bowler Metcalf's 25 years of profits

Bar one or two years (and depending on how investors view the real measure of growth) Bowcalf has managed to produce real growth for two-and-a-half decades.

The market might be treating this consistent performer rather shabbily, considering the modest market rating it accords the share. On a historical basis Bowcalf is trading on a price:earnings ratio of 11 and on a forward basis - assuming a slow but sound second half to June this year - the price:earnings ratio may be closer to 10.

The detraction for Bowcalf, which managed a 7% increase in basic and diluted earnings to 43c/share in the six months to December, is an extremely tough trading environment for its core plastics business.

The increased labour, input and energy costs known but the company's ability to recover higher costs is hampered by consumer buying decisions that are being driven largely by price rather than quality.

Under these circumstances the company's achievement in turning the R188,5m generated from plastics packaging revenue into attributable profits of R25m should be lauded. Most importantly, the operating margin in the plastics packaging business recovered to 13,2% from just 10,8% in the second half of the year to June 2012.

This speaks volumes for the ability of Bowcalf's management to find operating cost savings in a company which, despite its successes, has maintained a Spartan corporate regime.

Margin recovery

The strong margin recovery is encouraging for the remainder of the financial year, but some investors might take fright at Bowcalf's chief executive Friedel Sass's reference to seasonal demand "tapering off dramatically" in the final weeks of the interim period.

It might be more prudent for them to assess the plastic division's longer-term prospects. Sass says there are signs of increased activity on new projects, which is good news for a versatile operator with high-quality packaging applications.

Of course, these projects may typically only manifest in the revenue and profit lines in the next 18 to 24 months. But the chances of banking sizeable contracts must have increased with the recent weakening of the rand against major currencies, which should raise the likelihood of multinational customers returning to locally sourced packaging solutions.

What probably does warrant closer observation in the shorter term is Bowcalf's plans for its soft-drink filling operation, Quality Beverages (QB)

Last month Bowcalf bought the remaining 25,1% it did not already own in QB for R34,5m. The transaction values QB at roughly R138m - a seemingly fair price, considering the filling operation recorded interim earnings of R5,6m from turnover of R190m.

QB's profits are currently driven by the strong niche captured by its flagship Jive brand in the Western Cape. The challenge, however, is to extend Jive into Gauteng. This could be a long and costly process, remembering that QB took the best part of 20 years to build its profitable niche in the Western Cape.

From an operational perspective the Johannesburg filling plant is ticking along nicely, but Sass admits brand-building in Gauteng has not delivered the desired results, "leaving the associated costs unrecovered".

Whether Bowcalf's major shareholders are happy to accommodate several more years of losses from QB's Gauteng operation remains to be seen. Perhaps it would make more sense to sell QB to, or partner with, one of the large food companies that hold existing beverages capacity.

On paper, QB would conceivably fit well into Pioneer Food Group's Ceres Beverages and Clover's fledgling beverages operation, or even add a new leg to rapidly diversifying liquor group KWV.

These options would relieve Bowcalf of the capital requirements needed to drive QB's growth into new territory, but retain the important bottle-manufacturing contract.

Sass says Bowcalf is open-minded on QB. "If we ever considered a deal with QB, we would need the right fit. Right now our main focus is to improve QB's Gauteng results."

Source: Financial Mail via I-Net Bridge