Why S&P is now upbeat on PPC
IMPROVED: CEMENT MAKER’S LIQUIDITY POSITION
For long-term sustainability, profitability has to improve in the DRC.
and Canada’s investment holding firm Fairfax, which was strongly rejected by PPC shareholders.
So precarious was PPC’s financial position that rating agency S&P Global Ratings cut the company’s long- and short-term corporate credit ratings to zaBB- and zaB respectively in 2016.
Two years later and a more than 50% drop in PPC’s share price, a different company has emerged, even prompting S&P to upgrade its credit rating.
S&P raised PPC’s long-term corporate credit rating to zaA- and short-term to zaA-2 (both investment grade). In a note, S&P said the improved rating reflects PPC’s “broadly stable” underlying credit metrics, earnings and adequate liquidity.
The upgrade in PPC’s credit rating is largely due to its significant progress in strengthening the balance sheet by restructuring SA debt, reducing interest rate costs and with the performance of its rest of Africa operations.
PPC successfully raised R4 billion in 2016 via a rights offer, reducing group debt from R9.1 billion in the year to March 2016 to R4.7 billion in the year to March 2018. PPC also managed to negotiate a two-year moratorium for DRC project funding of R2.1 billion (representing more than 35% of its total debt) with interest payments also extended by two years.
“In our opinion, its improved capital structure and liquidity profile will help mitigate the adverse effects of cyclicality in the building materials industry, especially given the relatively depressed operating environment in SA,” S&P said. Mishal Emeran, an analyst at Electus Fund Managers, says that although PPC’s shortterm liquidity position has improved, for the company to be sustainable over the medium-term, profitability has to improve in the DRC. Interest rates have increased for the DRC funding and a R1.6 billion debt payment due in June 2018 was refinanced with two loans.
“The trade-off for short-term liquidity has been more expensive debt, which implies there is less margin for error and a higher profitability requirement over the medium term,” says Emeran.
Trade-off for shortterm liquidity has been more debt