PPC is shifting its focus to growth after SA's largest cement producer clinched a debt-restructuring deal that removed a major overhang on its immediate future.
The group will give details on its strategic direction in 2022, CEO Roland van Wijnen told Business Day, with only minor “housekeeping” left as PPC looks to close the book on a painful two-year restructuring exercise within the next month or so.
The cement giant, whose origins date back to 1892, has been operating under the shadow of a possible rights issue for much of 2021, but asset disposals and improved cash generation have now ended this threat.
Sealing the debt restructuring deal in Democratic Republic of Congo (DRC) — under which the company agreed to hand lenders sovereignty over the Central African business in exchange for removing the SA business as a collateral if the struggling business failed to keep up with debt repayments — also freed up Wijnen to think about the strategic direction of the company.
The new growth blueprint would be built on a company solidly in the black after PPC almost tripled profit to R933m in its six months to end-September, as higher volumes, which were 5% above pre-pandemic levels in SA and Botswana, and cost-cutting helped offset rising input costs.
The group grew revenue 20% to R5.1bn to end-September, while core profit in its SA and Botswana division — about two thirds of revenue — rose 53% to R515m, with margins better than they were before Covid-19.
Although robust demand from the retail sector was petering out, the group was encouraged by record order books from the likes of customers such as Raubex, said Van Wijnen, referring to a road construction company that has been painting a rosy picture for infrastructure spending in the coming years.
The group has also received a win in terms of the state's ban on using imported cement for government-funded products, but Van Wijnen said the benefits would be dependent on the timing of those getting under way.
“We are pleased the government understands and recognises the importance of the local industry,” he said.
Price pressure
PPC implemented price increases that partially offset the input cost inflation of 9.2% with selling prices increasing by 4% to 8%, profit margins improved and the group said it picked up some of the increased market demand.
Focus was both on passing on costs and reducing them, said Van Wijnen, with heavy attention on procurement, as well as being proactive in ensuring its products were available in places where they were in heavy demand.
“We were more flexible with trucks, we made sure they used the shortest routes, and we took out certain redundancies,” he said.
The market remained highly competitive, he said, and PPC would not be jeopardising its market share, which it was currently comfortable with. Given the new localisation rules, PPC would also need to avoid any accusation of predatory pricing, he said, and while it had no intention of being predatory, it would be under more scrutiny.
“We will have to regularly adjust our prices, and do our homework on the cost side,” he said.
Debt erosion
Improved cash generation helped PPC trim debt by a further R309m period-on-period to R2.3bn. Proceeds from the sale of PPC Lime and the aggregates business in Botswana were also used to repay debt after the period end, with the group realising a net profit of R189m on the sales.
The sales have resulted in lenders dropping any requirement of a rights issue, but the company has not yet inked new long-term agreements with lenders that will allow it to once again pay dividends.
PPC’s shares have almost quadrupled so far in 2021, rocketing since March when that agreement was announced. The were trading 1.5% higher at R5.22 in afternoon trade on Tuesday, a dramatic reversal of fortunes for the stock that once fetched just over R35 rand in 2007 in the construction boom ahead of the 2010 World Cup.
Van Wijnen did not go into detail on what would be next for PPC, but did indicate that the group was focusing heavily on reducing its carbon footprint.
PPC had also indicated that it may introduce an external equity partner for its international business — which encompasses its operations in the rest of Africa — which would allow it to fund growth without the need for cash from SA.
Chronux Research analyst Rowan Goeller said the cement market had settled relative to strong supply growth in recent years, including new entrants and imports.
PPC probably had the most spare capacity to respond to demand growth, and could grow its share as the infrastructure investment gave demand a push, even as the retail mini-boom receded, he said.
“Imports and blenders are a large part of the market, but with government restrictions on public purchases of cement and possible tariffs, this might fall off — and local producers would increase market share,” he said.
“I believe that PPC is now fairly valued after years of balance sheet concerns depressing the valuation,” he said. “PPC has repaired its balance sheet and a dividend resumption is probably not far off.”
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