PPC should have spotted problems earlier

The share price of cement maker PPC has dropped 26% in the past week, most of it in one day — the day it shocked the market with an announcement of a planned rights issue.

Over three years, the capital loss for investors had ballooned to 64.5%

The proposed rights issue will be at least R3bn and not more than R4bn, the bottom figure being equal to half the company’s present value of R6.8bn on the JSE. The proceeds of the rights issue, says PPC, will be used to “reduce current debt levels and fund existing committed expansion capital expenditure and investment projects”.

PPC is also faced with the possibility of a credit downgrade, and looks to the rights issue to improve its debt pile of R8.9bn at the year ended September. Serviced from revenue of only R9.2bn, this will rise to about R12bn in the next two years as its capital expansions in the rest of Africa near completion.

Though the problems leading to the capital raise could not have been entirely anticipated — the main one being the weakening of the rand since December (making the US dollar investments more expensive than budgeted), together with the lower demand as a result of slower economic growth across Africa — the board and executive team at PPC must shoulder the blame for not predicting this.

The executive, especially the finance director, slipped up badly. They should have spotted the problems earlier, if they need to raise cash of that magnitude, and the same applies to the debt.

When the company embarked on a much-needed capital programme building cement plants in markets like Rwanda, Ethiopia and the DRC, someone should have done financial modelling showing revenues would come under pressure while construction was under way in the countries.

But they all took their eye off the operational ball, while distracting themselves with boardroom politics. They should not have been surprised. Did the board ask the right questions?