PPC chief feels the pres­sure in midst of per­fect storm

CityPress - - Business - JUSTIN BROWN justin.brown@city­press.co.za

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

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