No bright ending in sight for long tale of troubles
ement group PPC has a lot to deliver in the next few years, especially from its nascent rest-of-Africa operations. Already in conversations and media reports about the company the 2016 date set for 40% of revenues to be derived from elsewhere on the continent has slipped to 2017.
It has been a rough few years and then some for the share, since SA’s construction industry ran out of steam after the 2010 soccer World Cup.
The past year has been the worst of the lot, with the stock losing half its value in that time, before creeping up again. But even at around R20 now, the share price does not reflect great value against a price-earnings multiple at about 14 times.
Competition in regional cement markets has toughened considerably with the entry of Nigerian-backed Sephaku Cement and the imminent output from Chinese-backed Mamba Cement.
CBut PPC has welcomed the recent imposition of provisional antidumping duties on Portland cement up to November 13 by the International Trade Administration Commission of SA, following the body’s investigation into dumping of cement from Pakistan.
The company’s shares made their biggest intraday gain in more than six years after the announcement, jumping more than 8%.
Imara SP Reid analyst Sibonginkosi Nyanga says the 38% plunge in PPC’s headline earnings per share in the six months to March “fairly reflects” the difficulties faced by SA’s construction sector.
The sudden departure of former CEO Ketso Gordhan late last year after a battle with the board also helped undermine confidence in the company.
However, Renaissance Capital in February maintained a “buy” on the stock for this financial year, with the company now under Darryll Castle. The new CEO speaks of cost containment, efficiencies and a focus on sales and marketing.
SA is the main group revenue generator — and will remain so — but the rest of Africa will provide 40% of total revenues by 2017, so it is driving new growth. Castle seems to have reassured the market. Renaissance says PPC management has emphasised that the group is nowhere near breaching its covenant of three times net debt to earnings before interest, tax, depreciation and amortisation.
Renaissance says despite “short-term headwinds”, it is confident that the outlook for PPC will improve over the next 12 to 18 months. It estimates a 10,5 times one-year forward price-earnings multiple that offers value to the “patient investor”.
To this end the group has ring-fenced debt and cash for its African investments. These include a new 600 000 t/year plant in Rwanda; a 1 Mt/year cement factory being built in the Democratic Republic of Congo, and a new 700 000 t/year cement mill in Zimbabwe.
But its 51%-owned, $135m Habesha facility near the Ethiopian capital of Addis Ababa (1,4 Mt/year) is behind schedule, the company says.
Victor Seanie, investment analyst at Kagiso Asset Management, says apart from Sephaku aggressively taking market share from PPC by undercutting it on price, slow growth in SA is forcing cement players to shave prices to keep plant capacity utilisation high enough to cover costs and meet their volume growth targets.
He also says that PPC’s net interest expense has risen 27% year on year, because debt has increased to fund the cement plant projects elsewhere in Africa.
Meanwhile, South African core cement volumes declined by 3% in the interim period to March, as core selling prices fell 2% in a poor economy.
However, fears that the company would merge with Afrisam have been allayed since PPC said it was unable to reach consensus on the terms and had terminated discussions.
Renaissance has stated that such a merger would likely have significantly over-stretched PPC management “for an extended period of time”, diverting its attention from its core strategies and allowing competitors to take market share.