PPC’s problems highlight challenges facing local companies venturing into Africa
PPC’s ventures into Africa are a bittersweet tale of navigating difficult terrain and keeping an eye on the long-term gains to be reaped from its investments.
But for now, CEO Darryll Castle would rather take a more conservative view of the company’s operations as he reflects on “a challenging financial year” for PPC.
Liquidity constraints, leadership uncertainty and a 9% fall in cement prices — in Zimbabwe, the Democratic Republic of Congo and Botswana — are some of the difficulties Southern Africa’s largest cement maker faces from its operations on the continent.
Add its travails in South Africa — which include low prices for cement, the threat posed by cement imports from Pakistan and China and slow economic growth compounded by the credit ratings downgrades — and PPC shareholders are likely to be on the edge of their seats.
This week PPC reported that group revenue rose 5% to R9.6billion in the year to end-March. Group earnings before interest, tax, depreciation, and amortisation declined 13% to R2.1-billion, while headline earnings per share tumbled 93% to 7c, down from 107c. The group had been affected by the downgrade of its credit rating to junk by S&P Global Ratings during the financial year.
On Thursday, PPC’s shares were trading at R5.13 according to Bloomberg data, a marginal slip from R5.20 when trading closed on Wednesday after the results presentation for the fullyear ended March.
But a five-year analysis of PPC’s stock price shows the extent of the carnage — with the share price down almost 72%, from 2012 when it was trading at R18.
Shiraaz Abdullah, an equity analyst at Sanlam Private Wealth, said PPC was bleeding from its operations in the rest of Africa, in particular in the DRC in which it invested $300-million to set up its largest operation outside South Africa.
Now an uncomfortable spotlight had been shone on the analysis on which PPC’s decision-making process relied when entering some of its African markets, he said.
“They commissioned their plant two months ago in the DRC, but the environment there is tough as it is linked to the political turmoil. Currently everyone is in limbo, the demand for cement is poor and when they commissioned the plant they expected huge returns,” Abdullah said.
“Only Rwanda and Ethiopia have a pretty positive growth story. They are ramping up production and the markets are growing. In Zimbabwe, they are also not sure what is going to happen as elections approach.”
Ideally, the rest of Africa was meant to offer an opportunity to diversify earnings for South African companies. But in practice, their units there have in many cases not propped up companies when the chips were down at home.
Adrian Cloete, a portfolio manager at PSG Wealth, said PPC’s travails in Africa brought to the fore the extent of the difficulty of doing business in Africa’s 54 countries “that have different cultures, markets and ways of doing business”.
But when the tough times do hit the Africa operations, the massive investments made by South African companies in those markets make it difficult to pack up and leave.
PPC, across its four units in the DRC, Ethiopia, Rwanda and Zimbabwe, has invested in cement plants with a combined project cost of $719-million (about R9.2-billion).
The disposal of any of these assets appears to be out of the question. Castle said the rest of Africa cement projects had increased PPC’s cement capacity and geographic footprint.
“PPC remains well positioned for the medium to long term, notwithstanding the current challenging operating climate. The business will continue to focus on mitigating economic and market risks in the regions we operate in, while continuing to optimise the group’s capital and cost structures. This should enable the group to compete efficiently and effectively in all our geographies.”
The life span of its limestone reserves in Africa ranges from 12 years in Rwanda to 54 years in the DRC, reinforcing the view that PPC is in for the long haul.