PPC – is this up­side tan­gi­ble?

Finweek English Edition - - KILLER TRADE - BY MOXIMA GAMA

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.

POS­SI­BLE SCE­NARIO:

PPC could fa l l back to t he R16.20 key sup­port mark on down­side through the R19.50 level.

AL­TER­NA­TIVE SCE­NARIO:

R16.20 - R34.71

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