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PPC ponders reinstatement of dividends

Group last paid a dividend in November 2015.
Group revenue rose 20% to more than R5bn in the six months to end-September. Image: Moneyweb

JSE-listed cement and building materials company PPC has delivered another solid financial performance, enabling it to further degear its balance sheet, and has indicated that it is getting to a point where it can consider again paying shareholders a dividend.

PPC last paid a dividend six years ago in November 2015.

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Group CEO Roland van Wijnen confirmed on Tuesday that once the group has degeared its balance sheet to an appropriate level, it will lead to a situation where it can consider resuming dividend payments.

“I think it is important for our shareholders to get a return on their investment. They have been waiting for a long time,” he said.

Resilience

Van Wijnen said PPC produced a resilient financial performance in the six months to end-September 2021, with its gross South African debt reduced to R1.7 billion.

However, Van Wijnen said this does not yet include the about R500 million proceeds from the divestment of PPC and Botswana Aggregates, which will be used to further reduce the group’s South African debt.

Read: PPC secures R2.1bn in new facilities from its SA lenders

“With this, we will have put PPC back on a solid footing when it comes to our balance sheet,” he said.

Van Wijnen added there is a further about R600 million in its Zimbabwe and Rwanda operations that will also be used to reduce debt.

Van Wijnen said PPC’s capital restructuring is finished apart from some outstanding administrative and paperwork and it should all be completed by the end of this year.

“We have a clear undertaking that a capital raise is no longer needed and there is no longer any recourse from PPC DRC back to South Africa so for me it [the capital restructure] is done,” he said.

Group revenue rose by 20% to R5.1 billion and benefitted from a 12% increase in cement sales volumes and the positive impact of hyperinflation accounting on PPC Zimbabwe’s financials.

Read: Capital raise by PPC appears increasingly unlikely

Van Wijnen said the group’s South African cement volumes were 5% higher than they were pre-Covid-19, which is in line with their expectations.

Capacity

PPC Cement South Africa and Botswana MD Njombo Lekula said at this stage the group has in excess of two million tons of capacity it can bring back in the event of further increased demand.

Van Wijnen said the average producer price index for PPC South Africa Cement is at 9.2% and its price increases are on average between 4% and 8%.

“The only reason that we have been able to increase our margin from 14.4% to 18.7% is on the back of the hard work done by the people in team PPC,” he said.

Van Wijnen said the largest cost increases were electricity and distribution, with electricity costs increasing by 16%, distribution costs overall by 12% and “fuel higher than that”.

PPC group earnings before interest, tax, depreciation and amortisation (Ebitda) grew by 13% higher to R945 million and group operating profit increased by 10% to R633 million.

Cash generation was strong and PPC settled a further R309 million in debt in the period.

Basic headline earnings per share rose by 83% to 55 cents.

Lekula said the recent designation of locally produced cement for all government-funded projects will have a positive impact on the industry once the infrastructure rollout gathers momentum.

But Lekula said they had not yet seen any improvement in demand for cement because of the designation of cement.

Read: Treasury bans use of imported cement on all government-funded projects

“We are obviously hoping that the infrastructure rollout from the government will kick off. We have seen some green shoots in road projects that have started already. What we are hoping that designation will do is again conscientise people in terms of that spend from the government.

“But that is just a very small portion of what we are able to get into the market at this stage. Retail is where you and me have to decide what is the right thing to do,” he said.

The South African cement industry has also applied to the International Trade Administration Commission (Itac) for tariff protection against imported cement.

But Van Wijnen said cement imports continue to surge on the back of some Asian countries dumping their materials below full cost price in the market.

“For every bag of cement that is not produced locally, a local producer is unable to contribute to the communities in which they operate … unable to pay taxes that help to drive society. For every bag that is imported, a company in, for example Vietnam, is able to pay taxes and help their communities,” he pointed out.

“As a global citizen, I shouldn’t mind where the development takes place and whether we lift poverty in Vietnam or in South Africa. But as a temporary resident of South Africa it pains me to see that we are not doing the maximum to bring South Africa up to the next level that it so much needs,” he said.

Read: Cement imports rocket by 51% in the first eight months of 2021

Looking ahead, Van Wijnen said PPC’s focus is on optimising operational efficiencies to mitigate increasing input cost pressures and reduce its environmental footprint while further enhancing its financial resilience.

Analyst comment

Rowan Goeller, an analyst at Chronux Research, said the cement market has normalised, adding the last five years have been tough for PPC with new competitors and suppliers entering the market, including importers and blenders, and weak demand.

Goeller said the cement market is cyclical but it is relatively settled currently and “PPC balance sheet wise has emerged from a very tough time”.

“You have now got steady straight cement operations, which you have not seen for a long time, and the share price I think is kind of reflecting that now,” he said.

Goeller pointed out that it will be challenging for PPC to achieve real price increases given the high cost inflation.

However, he said a ruling by Itac on tariffs on imported cement will immediately give local producers back significant market share, about 10% of the current demand, and also increase plant utilisation rates.

Goeller said this will be beneficial to the cost per ton and getting the Ebitda margin above 20%, the level at which the industry is comfortable to reinvest in cement capacity.

He said it will be difficult to get margins above 20% at the moment purely on pricing and this probably needs to be achieved through volume growth “if imports are cut out of the market through tariffs” and plants running at higher utilisation rates, which will help to reduce unit costs.

Shares in PPC dropped 3.4% on Tuesday to close at R5.12 per share.

Listen to Van Wijnen’s interview with Fifi Peters on the group’s latest results (or read the transcipt here): 

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With balance sheet and profits looking good, why would the share price drop? Had the market already priced in higher expectations?

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