Little left of one-day wonders
But PPC still firmly cemented
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.