No bright end­ing in sight for long tale of trou­bles

Financial Mail - Investors Monthly - - Analysis - Mark Al­lix

ement group PPC has a lot to de­liver in the next few years, es­pe­cially from its nascent rest-of-Africa oper­a­tions. Al­ready in con­ver­sa­tions and media re­ports about the com­pany the 2016 date set for 40% of rev­enues to be de­rived from else­where on the con­ti­nent has slipped to 2017.

It has been a rough few years and then some for the share, since SA’s con­struc­tion in­dus­try ran out of steam af­ter the 2010 soc­cer World Cup.

The past year has been the worst of the lot, with the stock los­ing half its value in that time, be­fore creep­ing up again. But even at around R20 now, the share price does not re­flect great value against a price-earn­ings mul­ti­ple at about 14 times.

Com­pe­ti­tion in re­gional ce­ment mar­kets has tough­ened con­sid­er­ably with the en­try of Nige­rian-backed Sephaku Ce­ment and the im­mi­nent out­put from Chi­nese-backed Mamba Ce­ment.

CBut PPC has wel­comed the re­cent im­po­si­tion of pro­vi­sional an­tidump­ing du­ties on Port­land ce­ment up to Novem­ber 13 by the In­ter­na­tional Trade Ad­min­is­tra­tion Com­mis­sion of SA, fol­low­ing the body’s in­ves­ti­ga­tion into dump­ing of ce­ment from Pak­istan.

The com­pany’s shares made their big­gest in­tra­day gain in more than six years af­ter the an­nounce­ment, jump­ing more than 8%.

Imara SP Reid an­a­lyst Si­bonginkosi Nyanga says the 38% plunge in PPC’s head­line earn­ings per share in the six months to March “fairly re­flects” the dif­fi­cul­ties faced by SA’s con­struc­tion sec­tor.

The sud­den de­par­ture of for­mer CEO Ketso Gord­han late last year af­ter a bat­tle with the board also helped un­der­mine con­fi­dence in the com­pany.

How­ever, Re­nais­sance Cap­i­tal in Fe­bru­ary main­tained a “buy” on the stock for this fi­nan­cial year, with the com­pany now un­der Dar­ryll Castle. The new CEO speaks of cost con­tain­ment, ef­fi­cien­cies and a fo­cus on sales and mar­ket­ing.

SA is the main group rev­enue gen­er­a­tor — and will re­main so — but the rest of Africa will pro­vide 40% of to­tal rev­enues by 2017, so it is driv­ing new growth. Castle seems to have re­as­sured the mar­ket. Re­nais­sance says PPC man­age­ment has em­pha­sised that the group is nowhere near breach­ing its covenant of three times net debt to earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion.

Re­nais­sance says de­spite “short-term head­winds”, it is con­fi­dent that the out­look for PPC will im­prove over the next 12 to 18 months. It es­ti­mates a 10,5 times one-year for­ward price-earn­ings mul­ti­ple that of­fers value to the “pa­tient in­vestor”.

To this end the group has ring-fenced debt and cash for its African in­vest­ments. These in­clude a new 600 000 t/year plant in Rwanda; a 1 Mt/year ce­ment fac­tory be­ing built in the Demo­cratic Re­pub­lic of Congo, and a new 700 000 t/year ce­ment mill in Zim­babwe.

But its 51%-owned, $135m Habe­sha fa­cil­ity near the Ethiopian cap­i­tal of Ad­dis Ababa (1,4 Mt/year) is be­hind sched­ule, the com­pany says.

Vic­tor Seanie, in­vest­ment an­a­lyst at Kag­iso As­set Man­age­ment, says apart from Sephaku ag­gres­sively tak­ing mar­ket share from PPC by un­der­cut­ting it on price, slow growth in SA is forc­ing ce­ment play­ers to shave prices to keep plant ca­pac­ity util­i­sa­tion high enough to cover costs and meet their vol­ume growth tar­gets.

He also says that PPC’s net in­ter­est ex­pense has risen 27% year on year, be­cause debt has in­creased to fund the ce­ment plant projects else­where in Africa.

Mean­while, South African core ce­ment vol­umes de­clined by 3% in the in­terim pe­riod to March, as core selling prices fell 2% in a poor econ­omy.

How­ever, fears that the com­pany would merge with Afrisam have been al­layed since PPC said it was un­able to reach con­sen­sus on the terms and had ter­mi­nated dis­cus­sions.

Re­nais­sance has stated that such a merger would likely have sig­nif­i­cantly over-stretched PPC man­age­ment “for an ex­tended pe­riod of time”, di­vert­ing its at­ten­tion from its core strate­gies and al­low­ing com­peti­tors to take mar­ket share.

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