Soft sell as hard times for cement loom

Financial Mail - Investors Monthly - - Analysis - Fifi Peters

When Sephaku made its for­mal en­try into the lo­cal cement mar­ket, the only way to achieve growth in the ma­ture and com­pet­i­tive in­dus­try was to un­der­price larger ri­vals PPC, Afrisam and La­farge and keep op­er­at­ing costs low.

The strat­egy, now seven years old, con­tin­ues to yield pos­i­tive re­sults for the SA sup­plier of build­ing ma­te­ri­als, backed by Nige­rian ty­coon Aliko Dan­gote.

For the year to March, Sephaku achieved dou­ble-digit rev­enue growth and in­creased af­ter-tax profit by 28% to R60.42m on the back of strong cement sales.

Sales leapt 162% in the year to December as SepChem ben­e­fited from re­duced competition fol­low­ing the im­po­si­tion of im­port tar­iffs on cement from Pak­istan.

SepChem has a December year-end as a sub­sidiary of Dan­gote Cement, which con­trols 64% of the com­pany.

The group filled the gap left by some Pak­istani play­ers ex­it­ing the bagged mar­ket, which caters to con­sumers mainly in the ru­ral ar­eas, as well as the ready-mix bulk mar­ket, which sup­plies to lo­cal con­struc­tion sites.

In the 2016 fi­nan­cial year, Sephaku’s Aganang and Del­mas cement plants in Lim­popo and Mpumalanga col­lec­tively achieved steady state ca­pac­ity util­i­sa­tion of 80%.

The mile­stone, which was fa­cil­i­tated by the im­ple­men­ta­tion of an ef­fi­ciency en­hanc­ing op­ti­mi­sa­tion pro­gramme, in­creased cement pro­duc­tion to 2.8 Mt dur­ing the year. Sephaku ex­pects the pro­gramme to im­prove the Ebitda mar­gins by 5%-7%.

Yet de­spite the com­pany’s strong op­er­a­tional im­prove­ments over the year, sen­ti­ment to­wards the stock re­mains sour.

Since re­leas­ing its year-end re­port on June 30, in­vestors have fur­ther di­vested their port­fo­lios of the share, bring­ing losses to about 30% since Jan­uary.

At R3.66 per share, the stock has al­most halved from its list­ing price in 2009 and is a far stretch from the record high of R10.15 it hit in April last year.

The unin­spir­ing out­look for the in­dus­try, dogged by an econ­omy that is go­ing nowhere fast and an in­dus­try leader (PPC) in cri­sis, is mak­ing ce­ment­ing any in­vest­ment in the sec­tor dif­fi­cult.

The PPC share price has plum­meted about 60% year to date.

“I don’t think in the com­ing year or so Sephaku will man­age to achieve such growth rates,” says Imara SP Reid eq­uity re­search an­a­lyst Si­bonginkosi Nyanga.

Imara rates Sephaku as a “spec­u­la­tive” buy.

“It doesn’t mat­ter who is back­ing you,” says Nyanga of Dan­gote’s ma­jor­ity con­trol of the

cement unit, “the main driver in SA is eco­nomic growth.

“SA’s growth rate re­mains at nought point what­ever per­cent de­pend­ing on who you lis­ten to, which means the prospects for cement play­ers re­main chal­leng­ing,” he says.

Sephaku CEO Le­lau Mo­huba says achiev­ing growth in the cur­rent eco­nomic en­vi­ron­ment will be dif­fi­cult. Mo­huba hopes strate­gic in­ter­ven­tions to im­prove op­er­a­tional ef­fi­cien­cies and the ap­point­ments of in­dus­try vet­er­ans Ken­neth Capes and Jür­gens du Toit to the Métier man­age­ment team will fa­cil­i­tate fu­ture growth.

Sephaku owns 100% of Métier Mixed Con­crete, which sup­plies mainly the con­struc­tion sec­tor.

But some mar­ket play­ers are not con­vinced that such in­ter­ven­tions will suf­fice.

“I am neg­a­tive on the sec­tor,” says Drikus Com­brinck of Cap­i­craft In­vest­ment Part­ners. “There is over­sup­ply due to many en­trants and there is not much de­mand due to low in­fras­truc­ture de­vel­op­ment ac­tiv­ity.”

Com­brinck says glob­ally the con­struc­tion sec­tor is un­der pres­sure, which is re­flected by plum­met­ing cement prices in China. This makes it cheaper for lo­cals to im­port cement from the coun­try, which is not sub­ject to a tar­iff, and there­fore adds to the over­sup­ply prob­lem.

Of the 91,000 t of cement im­ports that en­tered SA in the first quar­ter of 2016, about 98% were from China, Sephaku said last month at its year-end pre­sen­ta­tion.

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