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PPC recovering slowly

Challenges remain, but management seems to be doing the right things.

There is nothing like a few problems and a challenging environment to focus the mind. It forces people to take tough decisions, or face the humiliating alternative of failure.

It seems to have worked for PPC.

SA’s biggest cement producer announced that headline earnings per share (Heps) increased to 20c in the year to March from 15c in the previous year. It is a long way from the 7c in the 2017 financial year, when it looked like the company was going down the drain. To put it into perspective, Heps were a solid 179c in the 2014 financial year.

Shareholders definitely had little faith then and the share fell like a skydiver from 12 000 feet – from a high of more than R15 to only R5 within a few days. For the last year or so it drifted between R4 and R5 while management went about the business of fixing things.

Read: PPC picks ex-Lafarge veteran van Wiljnen as CEO

In a presentation of the results on Friday morning, management proved that it had the courage to admit to past mistakes and take tough decisions to fix things. Chief operating officer Njombo Lekula demonstrated that PPC cut through all the complexity and went back to the basic business principles of volume, price, production cost and profit.

Sector pressure

Cement volumes in the year under review remained sluggish due to adverse conditions in the building and construction industry. Volumes were also affected by imports of cheap cement, mainly from China, as well as the supply of low-quality blended cement products. PPC reports that imports increased by nearly 90% last year, largely sold at low prices close to the port of entry to avoid high distribution costs.

The result was that PPC saw its sales volumes in SA and Botswana decline by 2% to 3%, to yield turnover of R5.4 billion and earnings before interest, taxes, depreciation, and amortisation (Ebitda) of R957 million – 20% lower than in the previous year.

For once, SA shareholders can put their criticism of countries north of our borders aside. PPC reported strong cement sales in countries such as Rwanda, the DRC and Ethiopia. Sales volumes increased by 10% and revenue by 2% to R2.8 billion. PPC Zimbabwe is still struggling because the country is in a mess, but is surviving and servicing its own debt.

In essence, the demand for cement is a macro-economic variable and PPC cannot do much about it other than try to stay as competitive as possible and wait for the next economic upturn.

Slow and steady price increases

PPC has a bit more leeway on the price of a bag of cement. Builders might not like it, but PPC has been successful in slowly raising its prices year after year.

To be blunt, PPC admits to raising the price of a bag cement marginally just about every second month in SA, which resulted in an increase in the price of cement of around 10% since September 2018. These price increases have helped keep PPC in the black and are, unfortunately, unavoidable due to cost increases.

Lekula says production cost increased significantly due to an increase in the cost of raw material (up 39%), while the increase in electricity prices increased energy costs by some 22%.

The worst was the increase in distribution costs, which increased by 49% due to the big and unrelenting increase in fuel prices. A bag of cement is heavy and big trucks use a lot of (expensive) diesel.

Cost savings

Nevertheless, it was in looking at costs that PPC management seems to have done the right thing. Eighteen months ago management set a goal of cutting costs by R70 per ton of cement, and has delivered savings of R60 per ton to date.

As part of a two-hour presentation to shareholders, analysts and whoever wanted to connect and listen in, PPC chief financial officer Tryphosa Ramano said PPC initially aimed to reduce costs by R50 per ton, and stretched this to R70 per ton once initial investigations showed that it was possible.

PPC took tough decisions to cut head office costs and other overheads, and to relook and re-engineer its production processes.

These cost savings resulted in direct production costs increasing only 6% and administrative and other operating expenditure decreasing by 19%.

The announcement of what seemed like very good results received a lukewarm response from the market. PCC’s share price declined nearly 4% or 17c to R4.68 after the announcement of the results. The price-earnings (PE) ratio of more than 23 times shows there is much work to be done.

Good results, lukewarm response

Challenges include sluggish economic growth and slow volume growth, high debt levels, continued imports of cheap cement and continued cost increases. Management made a point of saying that the group paid more than R420 million towards debt and that cash flow will improve significantly going forward as capital expenditure to modernise and increase production reached a peak in 2016.

PPC paid attention to the maturity of its debt and had success in spreading it out over a few years “We are now comfortable with our debt profile,” says Ramano. “Very comfortable.”

She also expects cash flow to increase significantly over the next few years as capital expenditure decreases and demand recovers.

Shareholders seem to back PPC. Even if the share price is way off its high of R35 a few years ago, that high PE (of 23 times) indicates that investors are expecting PPC to continue its recovery.

 

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Luke warm response to good results are an indication of shareholders exhaustion. PPC was one of the first companies to let shareholders down with the rapid descent in value – before African Bank, Steinhoff, EOH and Tongaat so you’re going to have to forgive shareholders for their distinct lack of interest!

Yup; PPC taught me a good lesson. Avoid BEE operations, particularly those Gordhan like self enrichment schemes.

Two interesting things to note from the latest results
– the turn around in fortunes seems to be based on favorable exchange rate and the devaluation of the Rand
– there is still a huge discrepancy between Directors remuneration and Employees Remuneration – the very problem that resulted in a boardroom battle in 2014 and the beginning of the share price slide.
Have things really improved in fact? Time will tell.

PPC was once a very powerful company part of the Barlows industrial empire. It has no real strategic direction and the ‘heart’ of the company which is its employees has become hollowed out – the decades of know how and experience have left this company – a microcosm of what is now unfolding in the broader economy.

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