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.