It's all in the packaging

"It was tough going in this sector in the first half of 2010, but demand surged towards the end of the year," says Bowler Metcalf MD Michael Brain. The surge, Stats SA reports, left retail sales in November almost 9% up on a year earlier.

Restocking

"Driving the recovery," Brain says, "was restocking by consumers, many of whom had cut back drastically on their use of even the most basic items during the great recession of 2008 and 2009." Restocking was evident in pharmaceuticals, cosmetics and toiletries, key sectors for the company, where sales in November 2010 were up 12.7% on a year earlier.

The surge in demand sets the scene for Bowler Metcalf to deliver a strong set of interim results for the six months to December 2010, to be released in March.

Brain is giving nothing away, but given the firm's ability to boost its EPS by 16% in the year to June 2010, against what Brain then termed a "depressed retail environment", a positive surprise appears in the offing.

How long restocking by consumers will persist is hard to say. Brain says he does not expect a repeat performance in 2011 but, rather, a return to business as usual in which demand growth will be more an uptick than a surge. He also says pricing arrangements with customers largely neutralise input cost fluctuations.

Beverage market

Not that Cape Town-based Bowler Metcalf is relying only on packaging to drive growth. After years of uninspiring performance, soft-drink bottler Quality Beverages, in which Bowler Metcalf has a 75% stake, came to the party in 2009/2010, with a 790% profit jump to R7,1m on a 22% rise in sales to R263m. Quality Beverages is spearheaded by Jive, which in its Western Cape home market is now an established brand, says Brain.

Bowler Metcalf has also taken Jive to the key Gauteng market, where Brain says it is "taking a good hold". So much so, he adds, that Bowler Metcalf will build a bottling plant there.

Sanlam Investment Management analyst Vanessa van Vuuren says: "There is a lot of scope for Quality Beverages in Gauteng. It's blue sky for them."

Modest ratings

Bowler Metcalf's potential has not gone unnoticed. Its share price rose by a third, to 810c, over the past four months. Despite this, the company is trading on a modest p:e of 9.6, one of its lowest relative ratings to the industrial index (12) in a decade.

Bowler Metcalf's lowly rating is hard to justify, given its record of growing earnings every year since it listed in 1987 and delivering average annual EPS growth of 17.6% over the past 10 years. Arguably, rival Transpaco has done even better, with EPS growth averaging 18.6% since 2000.

But, points out Van Vuuren, there are differences in market positioning that could make Bowler Metcalf a safer bet. She says it has a strong niche position in the complex high end of the market, where barriers to entry are high, whereas Transpaco's focus is on the flexible plastics packaging sector, which is fragmented and prone to pricing pressure.

Competitive potential

Bolder investors may be eyeing Astrapak, the largest plastic packaging player and willing to bet on CEO Marco Baglione turning four years of dismal performance around. He seems to be doing the right things, says Van Vuuren. Astrapak could well prove to be the top performer in 2011.

But for investors wanting an impeccable long-term track record, Bowler Metcalf stands out as first choice.

It has a historically consistent and solid return on equity and impressive operating margins, as proved in trying economic conditions. The group has a strong balance sheet and offers an attractive dividend yield of 4.4%. Analysts feel the group offers value trading at a p:e of 9.6 and a 60% premium to its NAV and would recommend that investors buy the share.

Source: Financial Mail