PPC shares on the rise after profit understatement
Audit reveals errors in financial results
THE SHARES of the country’s largest cement and lime maker, PPC, yesterday rose nearly 10 percent in early trade after it flagged auditing errors that resulted in the understatement of its profits.
The group said the audit for the 2020 financial results identified errors in the previous year’s financial results.
PPC said the errors reduced its basic earnings per share (eps) from the previously stated 16 cents by 43 percent to 9c and increased headline earnings per share (HEPS) by 15 percent from the previously stated 20c to 23c. It said its net asset value fell by R174 million from R9.3 billion in the prior year.
“Management has initiated, and will continue to implement, improvements to the internal control environment and related governance processes to ensure integrity of the information published,” the group said in a trading guidance to investors.
PPC, however, did not mention who was to blame for the 15 percent difference in HEPS.
A spokesperson said the group was in a closed period, and it therefore could not comment.
PPC said it did not impair an investment in Habesha Cement Share Company in Ethiopia – which it had since fully written down for R146m – as it should have been fully impaired in the prior year. It said impairment and the equity accounted losses would also be reversed, following the full impairment of the investment as at March 31, 2019.
Regarding a PPC Zimbabwe financial loan asset, the board said it would apply a credit risk adjustment against the asset as at March 31, 2019, with a pre-tax fair value adjustment of R36.7m.
At March 31, 2019, PPC recognised exchange gains of R116m from translation of the Democratic Republic of the Congo (DRC) deficiency loan.
The board said it now believed it was not appropriate to consider the loan as part of the net investment in the foreign operation, and the pretax exchange gain of R116m should have been recorded in the profit or loss statements in the consolidated financial statements.
Several other “smaller individually immaterial errors” were noted relating to the reallocation of intangible assets, reallocation between reserves and reclassification of investments as treasury shares, but these errors had no impact on earnings.
The group also delayed the release of its results by another month to September 30, because of the impact of remote working, the challenges of various levels of lockdowns in various countries for the year-end and the audit process, as well as being in the midst of a restructuring and refinancing project.
Earnings before interest, tax, depreciation and amortisation were expected to decrease by 15 to 20 percent, compared to prior year’s R1.97bn.
HEPS was expected to be 25c to 30c a share, reflecting a difference of 8.7 percent to 30.4 percent, compared with the “restated” 23c per share.
The difference between the basic eps and HEPS related to the impairment of property, plant and equipment in South Africa Cement, PPC Barnet DRC and Readymix, as well as the impairment of certain intangible assets and goodwill.
Included in HEPS was a net gain of R625m to R675m relating to hyperinflation accounting in Zimbabwe.
Double-digit year-on-year growth of cement volumes in South Africa during June continued in July after a strong reduction of imports.
The total cement volumes sold by the international subsidiaries also showed double-digit growth comparing July 2020 with July 2019.
Mergence Investment Managers head of equities Peter Takaendesa said the large restatements for previous years financials were likely to be a combination of new leadership at the company, weaker performance of those assets and timing differences on when to record those impairments.
“The new management team appears to be cleaning the financial position of the company to start from a cleaner base, but the impact of Covid is likely to be material and therefore reasonable to impair the expected cash generation of the business units identified in the business update,” Takaendesa said.
PPC shares closed 2.56 percent higher at R0.80.