PPC – don­ning a con­trar­ian hat

Finweek English Edition - - KILLER TRADE -

Wi t h i n f r a s t r uc t u r e spend­ing un­der pres­sure, the con­struc­tion in­dus­try and its re­lated sec­tors – such as steel and ce­ment – have been un­der pres­sure. Pri­vate sec­tor spend­ing on in­fra­struc­ture, for ex­am­ple, halved last year to R95.4bn. In ad­di­tion, con­struc­tion com­pa­nies have been hit by fines for col­lu­sion and pricef i xing on ten­ders, no­tably re­lated to World Cup sta­di­ums.

Prof­itabil­ity has plunged for most ma­jor South African con­struc­tion groups, and stock prices for the main JSE-listed con­struc­tion com­pa­nies have plum­meted be­tween 42% and 72% in the past year. Most con­struc­tion com­pa­nies have felt mas­sive pres­sure f rom a de­cline in min­ing in­vest­ment and the al­most “non-ex­is­tent” roll-out of large state in­fra­struc­ture projects in South Africa, while they are also fac­ing labour dis­rup­tions and prob­lems with legacy con­tracts.

On the plus side, draft reg­u­la­tions that aim to over­come prob­lems re­lated to non-pay­ment of con­trac­tors and sub­con­trac­tors in the build­ing and civil en­gi­neer­ing in­dus­tries were pub­lished ear­lier this month. Sim­i­lar pay­ment reg­u­la­tions have been in­tro­duced in the UK, Sin­ga­pore, Hong Kong, New Zealand, Aus­tralia and most re­cently Malaysia, and are said to have made a pos­i­tive im­pact.

With the con­struc­tion in­dus­try in the dol­drums, it’s in­evitable that sup­pli­ers to the sec­tor will suf­fer the same fate. PPC, which has been hurt by its own board­room squab­bles last year lead­ing to the high-pro­file de­par­ture of for­mer CEO Ketso Gord­han, has plunged to lev­els last tested in 2004.

De­spite PPC’s ef­forts to di­ver­sify, ex­pand and ac­quire busi­nesses i n Zim­babwe and Botswana, in­vestors are less than con­vinced. A pro­posed merger with AfriSam, which would have seen the com­bined group con­trol about 60% of the lo­cal ce­ment mar­ket, was called off in March.

But look at it this way: con­struc­tion in SA has suf­fered a big blow and the com­pa­nies have paid dearly in terms of share value. How far can these shares still fall? Wear­ing my con­trar­ian hat, to me, cur­rent lev­els make good buy­ing lev­els – a call that’s purely based on the fact that PPC, in par­tic­u­lar, could be bot­tom­ing up.

POS­SI­BLE SCE­NARIO:

PPC has bro­ken out of its steeper bear trend (within its ma­jor bear trend) and ended the con­sol­i­da­tion phase of a po­ten­tial bot­tom­ing-up pat­tern. Sup­port re­tained at 1 760c/share would i ncrease t he chances of t he group em­bark­ing on the ascending phase of the bullish re­ver­sal pat­tern to­wards the 2 840c/share prior high in the short term (one to six months). How­ever, stop losses should be care­fully mon­i­tored with this call. A 100% re­trace­ment to the 3 475c/share level would even be pos­si­ble above 2 840c/share.

AL­TER­NA­TIVE SCE­NARIO:

A re­ver­sal be­low 1 620c/share could trig­ger another sell-off to the 1 215c/ share sup­port mark – PPC would then test its 2003 lows.

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