Consolidation a must, maintains PPC
LISTED cement and lime producer PPC wants to be the architect of the consolidation of the cement industry in South Africa and sees its prospective merger with Afrisam as the first step in this process.
PPC chief executive Darryll Castle yesterday said that the industry would consolidate, because the cost base was too high as a result of six players fighting over a 15 million-tonsa-year market.
“By any benchmark, that is too many players for too small a market,” Castle said. “There is too much capacity in the South African market and that has led to lower profitability because prices are under pressure.”
Castle said each cement producer had a sales force, brand costs, logistics costs, marketing costs and just taking some of those costs out of the system would make companies a lot more competitive. “That is why over time the industry will in any case consolidate,” he said.
He stressed the outcomes of the consolidation of the cement industry in South Africa could be negative for PPC if it was not the architect of this process.
Castle said the R4 billion rights issue last year had relieved the pressure on PPC’s balance sheet, which was now a little bit more robust, to enable it to consider the merger.
In regard to Afrisam’s reported high gearing, Castle said one of the conditions of the proposed transaction was that Afrisam needed to resolve its balance sheet issues before PPC would proceed with any kind of corporate transaction.
“We don’t want to increase the risk to PPC shareholders from a liquidity perspective. You should have two companies merging with similar structured balance sheets, which means the whole (merged entity) should not be any more risky than PPC is now as a stand alone entity,” he said.
Castle added that quite a lot of work still needed to be done on the proposed merger, but he expected to be in a position in the coming months to take a merger proposal to PPC’s board for assessment.
PPC yesterday reported a 93 percent slump in headline earnings a share to 7 cents for the year to March from 107c in the previous year. Group revenue rose by 5 percent to R9.64bn from R9.19bn.
Earnings before interest, tax, depreciation and amortisation (Ebitda) declined by 13 percent to R2.06bn from R2.38bn. A dividend was not declared.
Castle said the lower Ebitda reflected a tougher operating environment, particularly in South Africa, and there were a whole raft of issues below Ebitda in PPC’s income statement that resulted in the dramatic drop in earnings.
They included the cost of PPC’s capital raise, the cost of unwinding its broad based black economic empowerment 1 scheme, an international financial reporting standards charge of more than R200m and a revaluation charge of R124m related to cash balances and VAT receivables in different currencies offshore.
But Castle stressed the real positive story was that PPC had got to the end of its African build programme with the delivery of new plants in the Democratic Republic of Congo, Ethiopia, Rwanda and Zimbabwe.
Castle said this was a huge positive because PPC’s capital expenditure would slow down and debt would be reduced further as these new projects started producing cash flow, which would first come through at the operating profit line and “then in a year or two” in earnings a share.
PPC shares fell 6.98 percent on the JSE yesterday to close at R5.20.