Re­al­ity catch­ing up


SO CE­MENT PRO­DUCER Pre­to­ria Port­land Ce­ment (PPC) isn’t im­mune to the re­ces­sion af­ter all. The group an­nounced its earn­ings will drop by more than 30% as ce­ment sales dwin­dled down back to 2004 lev­els. It’s a sur­pris­ingly big de­crease, say some an­a­lysts, and its share price saw an al­most 4% fall to 2500c on the day the trad­ing up­date was re­leased. PPC has been quite re­silient com­pared with the blood­bath other com­pa­nies in the con­struc­tion sec­tor ex­pe­ri­enced.

Fi­nally, the weak de­mand for ce­ment caught up with the group as its pric­ing power and mar­ket share di­min­ished on the back of a long and hard res­i­den­tial build­ing slump. And the ques­tion ev­ery­body is ask­ing is whether PCC will be able to con­tinue with its sat­is­fy­ing div­i­dend pol­icy. If div­i­dend cover re­mains the same, then the div­i­dend it­self will prob­a­bly also be down by 30%. Its div­i­dend is one of the main rea­sons the share was in­cluded in port­fo­lios un­til now. The near fu­ture isn’t look­ing too rosy ei­ther, with a re­cov­ery in the build­ing sec­tor that just won’t take off and up­start ce­ment group Sephaku adding ca­pac­ity to the mar­ket.

Cit­i­group has a “sell” rat­ing on the share and PSG a “hold”. How­ever, once Gov­ern­ment be­gins loos­en­ing its purse strings in the affordable hous­ing seg­ment, PPC’s sales vol­umes should see a re­cov­ery. But the tim­ing of that roll­out – as with other Gov­ern­ment in­fra­struc­ture projects and much to the frus­tra­tion of the rest of the play­ers in this sec­tor – re­mains a mys­tery.

The group’s re­sults for the year to endSeptem­ber 2010 show its cash bal­ance was a tidy R240m and that from op­er­at­ing ac­tiv­i­ties at R1,7bn. How­ever, the in­crease in ce­ment sup­ply – thanks to Sephaku and the profit-erod­ing ef­fects of in­creased elec­tric­ity prices – will put PPC’s cash flows un­der strain. We be­lieve its share price can only go down from here – un­til the cy­cle changes.

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