PPC – is this upside tangible?
My contrarian outlook on PPC since June seems to be in order – the cement producer’s share price is up 20% since my previous analysis published in the 25 June issue ( PPC – donning a contrarian hat). But now that it has recovered and is teetering on a key resistance level that dates back to 2011, does it still have legs to run in the medium term?
I believe so – provided it breaches that key resistance level. My analysis is purely based on sentiment, which has somewhat softened after years of pessimism. PPC has been through t urbulent times. Overall, cement manufacturers have been hit by a slowdown in infrastructure spending and increased competition, notably from Sephaku Cement and Mamba Cement, relatively new entrants into the regional market.
The local market has also been f l ooded by c heap i mports f r om Pakistan, which has been subject to provisional anti- dumping duties of between 14.29% and 77.15% since May. The provisional duties will remain in place until November, when they can be made more permanent.
In addition to the industry woes, PPC was also hit by its own boardroom squabbles, which saw former CEO Ketso Gordhan quit the group last year. The high-profile dispute contributed to PPC shares dropping to their lowest levels since 2004. A proposed merger with smaller rival AfriSam fell through in March as the parties couldn’t agree on the terms of the deal, and in May PPC reported a 38% decline in headline earnings per share for the six months to end March.
But despite PPC’s poor performance, investors seem to have faith that the new CEO Darryll Castle and a reshuff led board will be capable of improving its performance in the local market while building its operations on the rest of the continent. PPC is targeting the rest of Africa as the source of 40% of revenue by 2017, up from 26% in the half-year to end March.
PPC enjoys a strong market position in several African countries including Zimbabwe, Botswana and Rwanda. Its new plant i n Rwanda, with a capacity of 600 000 tons a year, is set to start commercial production i n the second half of the year, and the group is building t wo new plants, in the Democratic Republic of Congo and Zimbabwe respectively, where production is expected to start towards the end of 2016. It is also increasing its stake in Ethiopia-based Habesha Cement Share Company to 51%, which is building a 1.4m ton-a-year facility near Addis Ababa, with commissioning originally earmarked for 2016.
In my view, expansion plans are vital in reviving the company, restoring investor confidence and prompting a sustainable turnaround.
PPC could remain bullish in the medium-term, if upside persists above R22.50. But the overbought weekly relative strength index (RSI) may trigger a reversal that could compromise my positive outlook, unless support holds at R19.50. If so, PPC will most likely trade through the R22.50 level and return to the R27.75 prior high. This ascending phase could see PPC retest the R34.75 high in the medium term.
PPC could fa l l back to t he R16.20 key support mark on downside through the R19.50 level.
R16.20 - R34.71