A planned capital raise by JSE-listed cement and building materials PPC now appears increasingly unlikely.
“Where we stand today is that we have been able to convince the South African banks that we don’t need the rights issue right now,” said PPC CEO Roland van Wijnen on Monday.
Van Wijnen said the actions PPC has agreed with the banks will lead to the deconsolidation of PPC’s DRC operations and “cash-in” from divestments of non-core businesses PPC Lime and Botswana Aggregates, while “a continuous focus on our core business and its cash generation should be sufficient in order to restore our balance sheet”.
Van Wijnen stressed that he does not see the need for the planned capital raise if PPC implements the DRC restructuring, finalises the PPC Lime and Botswana Aggregates divestments and continues to operate as it has during the past months.
However, he admitted that the planned capital raise does not only depend on him.
“We will need to have another discussion with the South African banks,” he said.
Analysts weigh in
Analysts believe a capital raise by PPC is not required.
Peregrine Capital executive chair David Fraser said PPC produced solid financial results in the year to end-March 2021, with good cash flows.
“If you combine that with where the debt level was at the end of March [and] the transactions they have done post this, I think there is no need for any equity capital raising in this business, which is obviously a positive,” he said.
Rowan Goeller, an analyst at Chronux Research, said a rights offer is not required provided cement demand, which has been very strong, is maintained at current levels.
“The key thing about PPC now is that the free cash flow from South Africa is good and it covers everything that is required to be covered. It doesn’t need to rely on any cash from Zimbabwe or Rwanda or from the aggregates business.
“PPC is in a financially strong position and can probably avoid a rights offer purely off the South African balance sheet and what it generates,” he said.
DRC debt issue
The planned equity raise was among the undertakings given by PPC to its South African lenders in August 2020, but was subject to the resolution of PPC’s $175 million (R2.49 billion) senior debt exposure in the DRC.
PPC reported in March that it had resolved the group’s exposure to the senior debt in PPC Barnet in the DRC through a settlement agreement.
The restructuring of the DRC debt is scheduled to be completed by September 30.
PPC chief financial officer Brenda Berlin said on Monday that PPC envisages engaging with its primary lenders next month to agree on restructuring its facilities and finalising “the size, if any, of a capital raise”.
Berlin said their target is to complete these engagements no later than September 30.
She added that PPC reached a milestone on the DRC matter when it signed agreements on March 31 and all that remains now is the implementation of that restructuring before September 30, “which we are well on track to do”.
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Berlin said only the standard conditions precedent need to be met before the sale of PPC Lime and Botswana Aggregates can be finalised.
She said they do not expect any issues in this regard and envisage that the conditions will be met by September 30 for PPC Lime and July 31 for Botswana Aggregates.
PPC agreed in May to sell its wholly-owned lime business to investor consortium Kgatelopele Lime for R515 million and earlier this month reported it had agreed to sell Botswana Aggregates to a Botswana-based construction and mining company for about R60 million.
PPC on Monday reported a 3% growth in revenue to R8.9 billion in the year to end-March 2021.
Group Ebitda (earnings before interest, tax, depreciation and amortisation) increased by 16% to R1.6 billion and operating profit rose 75% to R1 billion.
However, overall profitability was negatively impacted by certain non-cash items, including fair value adjustments, foreign exchange movements and hyperinflationary accounting, resulting in headline earnings of three cents per share.
Cash available from operations improved from R273 million to R1 billion.
A reduction in South African and Zimbabwean debt levels led to finance costs dropping by 19% to R283 million.
Van Wijnen said PPC had gross South African debt of R1.9 billion at end-March, which is a slight improvement from the year before and includes a material total $16.5 million payment made to settle the DRC debt (which is included in the R1.9 billion South African debt).
Lower depreciation expenses and efficiency gains, which offset input cost inflation, resulted in cost of sales reducing by 1% to R6.9 billion while administration and other operating expenditure declined 14% to R1 billion, reflecting successful efforts to improve cost competitiveness.
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Van Wijnen said PPC has seen a strong recovery in South Africa, which was strongly driven by retail-driven cement sales, and is continuing to see a slow but steady growth of infrastructure projects being rolled out by the government.
“We have also seen in our financial results the impact of the many actions that we have taken over the last years. The reorganisation, particularly in South Africa but also in our international operations, have started to bear fruit,” he said.
Van Wijnen said that taking into account cash generation and debt levels, PPC “should become dividend-generative in the near future”.
Fraser said PPC’s management has during the past two years effectively been unwinding “the rubbish of the past”.
“At least now they are seeing the wood from the trees and are well positioned for the next few years to really put this company back where it was,” said Fraser.
Goeller said PPC’s management team looks very strong at the moment “relative to what PPC has had for quite a long time”.
“The results have been very messy for the last few years but if you just look at the performance down to the Ebitda level, South African cement was very encouraging because that is still the engine of the whole business.
“It’s looking good because they [PPC] spoke about getting above 20% Ebitda margins again and are probably there at the moment,” he said.
Shares in PPC rose 9.83% on Monday to close at R3.24.