PPC chief feels the pressure in midst of perfect storm
Cement maker PPC is between a rock and a hard place. Late last month, S&P Global Ratings cut the company’s credit rating to sub-investment grade, or “junk” status, which blindsided CEO Darryll Castle and his management team, and now the future of the company is hanging in the balance.
Castle described S&P’s move as a “sudden and severe rating action”.
At a presentation this week, he came across as a man under pressure as he tried to reassure investors about the strength of the company amid a funding crisis.
He pointed out that the “underlying business” performance was “quite good”, and said that there wouldn’t be a repeat of the difficult situation the company found itself in. “The current crisis will not recur,” he said. However, being cut to junk has meant that PPC, which had R460 million in cash available at the end of March, was obliged to pay R1.75 billion plus interest back to note holders – this debt was issued to the company as long as it maintained an investment-grade rating.
“The early settlement, which has negatively affected the group’s short-term liquidity, highlights a material uncertainty regarding the group’s viability as a going concern,” PPC said this week.
Deloitte & Touche, PPC’s auditors, said the company’s plans for a bridging facility to raise the capital were not sufficiently advanced to allow it to draw a conclusion on PPC’s ability to continue as a going concern.
PPC was in the final stages of concluding agreements with local financial institutions for a bridging guarantee of R2 billion to settle the outstanding note obligations, the company said.
After that, PPC is looking to raise between R3 billion and R4 billion in cash by issuing shares. That funding could be complete in September.
Castle told City Press that PPC had received “reasonable support” thus far from the company’s shareholders for the rights issue.
However, the turmoil at the company since the start of the year has knocked its share price down by 44%, and the group is only worth R5.2 billion. RM 10 000 9 000 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000
Castle said PPC hoped that S&P would grant the group investment status soon after the completion of the rights offer.
Gareth Visser, an analyst at Avior Capital Markets, said: “It will be interesting to get an idea of the price of the pending rights issue. We believe that, given the market’s reaction to the announcement, it may turn out to be very dilutive.”
If a rights issue is “dilutive”, it is likely to be issued at a substantial discount to the prevailing PPC share price to entice investors to put further money into the company.
“Despite the negative reaction to the pending rights issue, the capital injection will put PPC’s balance sheet on a stronger footing,” Visser said.
Adding to PPC’s woes is that a cement price war is emerging in the local market as a result of two new competitors, Mamba 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Cement and Sephaku Cement, coming online.
Sephaku Cement, in particular, was choosing to boost the volume of its cement production over the price at which it sold it, Castle said.
In addition, PPC’s new $280 million (R4.3 billion) project in the Democratic Republic of Congo could be between 4% and 6% over budget.
Castle is also forecasting tough economic times in South Africa, and the local industry is also facing the threat of cement imports, though these imports are dissipating.
Avior’s Visser said: “We remain concerned about PPC’s balance sheet, given potential cost overruns in the Democratic Republic of Congo, weaker cement prices across the continent and cash flow constraints, especially at this stage in the cycle.” PPC’s shares continued to fall this week. “Based on the market’s reaction to the initial announcement of the rights issue and ratings downgrade, it seems as if the market is reacting to concerns around the balance sheet, potential project cost overruns, medium-term headwinds in African cement markets and the potential dilution from the rights issue,” Visser said.
Castle said that PPC’s strategy was to go into Africa, and that the company would like to become a diverse Pan-African cement player.
Aside from the project in the Democratic Republic of Congo, PPC is developing three projects in Africa – an $85 million project in Zimbabwe, a $165 million venture in Rwanda and a $175 million undertaking in Ethiopia.
PPC’s burgeoning debt profile