Soft sell as hard times for cement loom

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.