Lit­tle left of one-day won­ders

But PPC still firmly ce­mented

Finweek English Edition - - Companies & Markets - VIC DE KLERK

THE SHARE PRICES of even the bet­ter class sup­plier of build­ing ma­te­ri­als to the res­i­den­tial and civil sec­tors per­formed poorly over the past year, with a fall of be­tween 40% and 50% seem­ingly the norm. That’s far more than the ex­tent of the lev­el­ling off in res­i­den­tial build­ing as well as in the prices of res­i­den­tial prop­erty. The prom­ise of a sharp in­crease in in­fra­struc­ture spending has so far brought lit­tle im­prove­ment for those com­pa­nies’ share prices.

In­vestors can learn quite a few lessons from this. There are 25 com­pa­nies listed in the build­ing ma­te­ri­als and fix­tures sec­tor. Over the past year it was one of the JSE’s weak­est sec­tors. Two years ago it was the favourite, with sev­eral new list­ings both on the JSE’s main board and nat­u­rally on the AltX.

The pros­per­ity in the res­i­den­tial sec­tor in the four years to 2007 at­tracted sev­eral ques­tion­able char­ac­ters to the JSE and they’ve even suc­ceeded in hood­wink­ing more than one ex­pe­ri­enced in­vestor. The same thing hap­pened in the IT sec­tor in 1998/1999.

Ex­ces­sive pros­per­ity at ground level in a cer­tain sec­tor of the econ­omy at­tracts sev­eral new “won­ders” to it and in­vestors must al­ways be on the look­out for them.

But what of the fu­ture? Many in­vestors cur­rently trapped in one of yes­ter­day’s one-day won­ders are prob­a­bly think­ing: Bad news. Very few of the 25 listed com­pa­nies in the sec­tor will ever re­cover suf­fi­ciently for in­vestors to see the peaks of a year or two ago. Even the hand­ful of in­vestors who thought at the time that they were lucky to re­ceive shares from pri­vate plac­ings and who didn’t take profit im­me­di­ately are now sit­ting with a lame duck.

How­ever, there’s still a great deal of in­fra­struc­ture in­vest­ment in SA and sev­eral golf­ing es­tates also still have to be com­pleted. So there are in fact still a few op­por­tu­ni­ties in the sec­tor, as well as among the spe­cial­ist sup­pli­ers of build­ing ma­te­ri­als. Pre­to­ria Port­land Ce­ment, one of SA’s lead­ing in­dus­trial com­pa­nies, is also in this sec­tor. In fact, PPC’s mar­ket cap­i­tal­i­sa­tion dom­i­nates the sec­tor and it will be dis­cussed sep­a­rately.

The ta­ble shows six pos­si­ble in­vest­ment op­por­tu­ni­ties in the sec­tor. That’s a pretty poor crop. WG Wearne is one of the most pop­u­lar new list­ings in the build­ing ex­plo­sion, even though its price has al­ready fallen from 600c to the cur­rent 195c/share. It’s prob­a­bly not the com­pany’s fault that in­vestors at one stage pushed the price to 600c/share.

Wearne has plenty of prom­ise. It’s one of the coun­try’s lead­ing sup­pli­ers of ready-mixed con­crete and all the ag­gre­gates – ag­gre­gate, gravel, sand and so forth – used in the build­ing process. It’s also busy ex­pand­ing ag­gres­sively with pa­per takeovers in the cor­rect ra­tios.

With so much in­fra­struc­ture spending on the hori­zon, it’s dif­fi­cult not to be­come ex­cited at Wearne’s fu­ture. How­ever, the poor per­for­mance of its share price and the ab­sence of a proper div­i­dend are clear signs that it’s not suit­able for wid­ows and or­phans. The same can be said for Afrimat. Dawn was un­til re­cently one of in­vestors’ favourites, who sim­ply couldn’t find enough to say in praise of the ex­cel­lent op­por­tu­ni­ties of­fered by this spe­cial­ist dis­trib­u­tor of build­ing ma­te­ri­als. Its share is cur­rently trad­ing at an at­trac­tive earn­ings mul­ti­ple of 8 and the group is achiev­ing a re­turn of more than 50% on eq­uity. How­ever, rather poor cash flow and per­haps ex­ces­sively ag­gres-

sive ex­pan­sion through takeovers over the past few months have put in­vestors off to a cer­tain ex­tent, which ex­plains the 46% fall in its share price.

The same fac­tors – that is, lower in­ter­est rates (still just a mirage in the fu­ture) and on­go­ing good per­sonal in­come without too much debt (also a mirage), which could bring about a re­vival in the res­i­den­tial prop­erty mar­ket – will also be good for the three com­pa­nies’ share prices. Thanks to the sig­nif­i­cant falls in their share prices over the past year or so they may of­fer a quicker profit than an or­di­nary res­i­den­tial prop­erty for the more dare­devil in­vestor.

PPC Ce­ment, with a mar­ket cap­i­tal­i­sa­tion of R16bn, is of course the star in the build­ing ma­te­ri­als sec­tor. Dur­ing the mar­ket re­vival, which started some­time in 2002 or 2003, the com­pany’s profit, and es­pe­cially its cash flow, just couldn’t stop ris­ing. That over­flowed to its share price and it even had to be sub­di­vided in a ra­tio of 10 for one last year af­ter a ten­fold in­crease over the pre­vi­ous five years. Then build­ing work in the res­i­den­tial sec­tor started lev­el­ling off and now PPC’s share price is 42% lower than last year’s peak.

It looks as if the strong in­crease in the de­mand for ce­ment from the in­fra­struc­ture sec­tor won’t be en­tirely suf­fi­cient to make up for the lev­el­ling off in de­mand from the res­i­den­tial sec­tor and a small de­cline of around 2% in the vol­ume of sales for the cur­rent year can be ex­pected. How­ever, on the fi­nan­cial side it’s still go­ing well with the com­pany.

For the six months to 31 March, turnover was 12,8% higher and head­line earn­ings in­creased by 16,7% to 126c/share. Its in­terim div­i­dend was also in­creased by 16% to 45c/share.

Re­fer­ring to its prospects for the rest of the year, PPC said in its half-year sur­vey: “The com­pany is con­fi­dent that in spite of cur­rent con­di­tions (the ex­pected 2% de­cline in sales vol­ume) we can look for­ward to re­port­ing a good per­for­mance and strong op­er­at­ing cash flows for the full year.”

That fore­cast, along with PPC’s sig­nif­i­cant ex­pan­sion of its pro­duc­tion ca­pac­ity, both in the north of the coun­try and in the West­ern Cape, and the pos­si­ble re­cov­ery of ac­tiv­i­ties in Zim­babwe, should ac­tu­ally make in­vestors quite op­ti­mistic. De­spite that, its share price is now 42% lower than a year ago.

PPC’s div­i­dend pay­ment and, par­tic­u­larly, spe­cial div­i­dends might not be as gen­er­ous in fu­ture as in­vestors have be­come ac­cus­tomed to over the past few years. It needs bil­lions to fi­nance its ex­pan­sions and, un­like what it’s been ac­cus­tomed to for many years, there are al­ready sev­eral en­tries for bor­rowed money to­talling R2bn on its bal­ance sheet.

The growth in div­i­dends could per­haps be much less and, un­like the past, the share may be los­ing some­thing of its won­der­ful sta­tus as an ex­cel­lent growth share that also pays an ex­cel­lent div­i­dend.

We’ve con­sid­er­ably scaled down the con­sen­sus views as re­flected by McGre­gor BFA – for ex­am­ple, re­duc­ing their pre­dicted div­i­dend for the year to 30 Septem­ber 2010 from 383c to only 260c/share.

How­ever, my pre­dic­tion for PPC’s profit of 370c/share doesn’t dif­fer much from the con­sen­sus view of 407c/share. The more con­ser­va­tive div­i­dend is nec­es­sary to make pro­vi­sion for fi­nanc­ing the sub­stan­tial ex­pan­sion planned by the group.

But the short ta­ble of what in­vestors can ex­pect from PPC over the next five years still tells me it’s a bet­ter op­por­tu­nity now than mak­ing a buy-to-lease in­vest­ment in a res­i­den­tial house. The ini­tial div­i­dend yield will be some­where in the re­gion of 7%/ year. Any owner of a house or flat will know that kind of re­turn isn’t easy to achieve – not even from the best ten­ant.

Look also at the ex­pected earn­ings per share of 370c by 2010. If in­ter­est rates have fallen some­what by then, PPC’s shares should again be trad­ing at a PE of at least 11. That gives a pos­si­ble price of R40/share by Septem­ber 2010. That’s an in­crease of 35% over the cur­rent price. If you still be­lieve buy­ing and leas­ing res­i­den­tial prop­erty is a pre­ferred in­vest­ment, make sure your cal­cu­la­tion looks like this: cur­rent pur­chase price: R1m; net rental af­ter all costs: R6 000/month; ex­pected price of the prop­erty in Septem­ber 2010: at least R1 350 000. Re­mem­ber to also add to those fig­ures the very high trans­ac­tion costs of up to 10% of the pur­chase price of the prop­erty.

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