JSE-listed cement and building materials producer PPC has secured R2.1 billion in new finance facilities from its South African lenders and will no longer be proceeding with a planned equity capital raise.
PPC confirmed on Tuesday it has signed non-binding term sheets with its South African lenders to refinance its existing debt obligations and remove the undertaking for a capital raise.
It also provided details about its double-digit increase in cement sales in the six months to end-September 2021 and the outlook for the group.
Shares in PPC rose by 0.73% on Tuesday to close at R4.13 per share.
The capital raise undertaking was aimed at enhancing PPC’s financial flexibility and degearing its South African balance sheet.
But the group’s South African lenders previously agreed to defer the timing of the proposed equity capital raise to the end of September and to also review the need for the capital raise.
This followed PPC reporting in March that it had resolved the group’s exposure to the senior debt in PPC Barnet in the DRC through a settlement agreement.
PPC said on Tuesday the R2.1 billion in new facilities have an extended maturity profile with the long term facility of R1.5 billion being repayable over three to five years.
It said the margins have been reduced across all facilities to reflect PPC’s improved credit risk profile.
The company will use the new facilities to refinance the drawn portions of existing facilities, leaving adequate headroom and financial flexibility over the next five years.
Rowan Goeller, an analyst at Chronux Research, said PPC’s financial restructuring appears to be largely complete now that PPC Lime is definitely being sold, which has helped PPC to refinance its debt and now has cheaper long term debt.
“Not having a capital raise hanging over your head is a big positive and they’ve passed that hurdle now,” said Goeller.
“By finalising the whole financial restructuring, PPC balance-sheet-wise is now in a reasonably strong position and the operational performance looks good.”
The removal of the capital raise undertaking is still subject to the completion of the disposal of PPC Lime by October 31 this year.
But PPC advised shareholders last week that all the outstanding conditions precedent related to the transaction with Kgatelopele Lime had been fulfilled on September 17 and the effective date of the transaction will be Friday.
In an operational update, PPC CEO Roland van Wijnen said the group expects total cement sales volumes to increase by between 10% and 13% year on year for the six months to end-September, with double-digit growth in most business units.
Van Wijnen said this increase occurred in the context of the hard lockdown in the first quarter of its 2020 financial year.
“If we look at 2019, we are about 3% to 6% ahead in South Africa, which is more or less in line with our expectations.
“We are positive about inland sales, which are being driven both by continuing strong retail as well as good industrial demand.
“Construction is also okay but it’s not as great as we would like to see it.
“What worries us the most is the performance in the coastal region, which has been hard hit by the lack of economic activity … and the [Covid-19] tourism impact,” he said.
“We see construction and industrial activity to still be quite low and hopefully tourism comes back soon as we are coming out of the third wave so there is a stimulus into the economy in the coastal regions.”
Van Wijnen said the financial performance of readymix and aggregates, which was also negatively impacted by Covid-19, has improved quite significantly from last year and the cost actions PPC put in place are now starting to bear fruit.
Continued threat of imports
The group said cement imports continue to threaten the sustainability of the South African cement industry, with total imports increasing by 14% year on year after adjusting for the impact of the hard lockdown in the prior comparable period.
It estimates that imports will account for about 10% of total industry volumes by the end of 2021.
Van Wijnen said this is equivalent to the production of one fully integrated cement plant that employs hundreds of people directly and thousands of people indirectly.
“So we are in job destruction and are paying as a country probably about $70 million a year into another country that is weakening the rand. It just doesn’t make sense,” he said.
The cement industry is waiting for a decision from the International Trade Administration Commission (Itac) regarding an application for protection against imported cement on the basis of unfair competition.
Red tape delays
It is also waiting for a decision from the Department of Trade, Industry and Competition on an application to classify locally produced cement as a designated product, which will make it compulsory for locally produced cement to be used in government-funded construction projects and to prohibit the use of imported cement in such projects.
Van Wijnen admitted that he would like to see more speed from Itac in taking a decision on the application for protection against imported cement but that he is slightly less impressed with the delay in designating cement.
“My understanding is that it has been approved and it is waiting to be gazetted … and I don’t know why it is taking so long,” he said.
“On the tariffs, we are still hopeful that by the end of the year we will get an outcome, at least an official confirmation that an investigation has been started and we can apply for temporary measures during that investigation.”
Van Wijnen said the designation of cement will send a strong signal to the market and “help a little bit here and there but not massively” and the more important difference will come from putting in place measures to level the playing field between local producers and imported cement.
He said tariff protection against imported cement will result in an immediate uplift of up to 10% in cement volumes in an industry that by far is not running at capacity and is highly fixed-cost-based.
“The additional volumes will help the local industry to produce more healthy returns and also lead to job creation.”
Goeller believes action against imported cement will mean that 10% of cement volumes will be up for grabs for local producers, which will be quite beneficial for capacity utilisation and the Ebitda (earnings before interest, tax, depreciation and amortisation) margins of local producers.
He said the South African cement market is normalising in the sense that it has gone through a period where new capacity came in but is now in full production, the volumes of blenders that chipped away volume from local players is down, and there is potential that importer volumes might be attacked “if government comes into play”.
Goeller said the cement industry has also had real price increases and producers can start to generate reasonable returns on their capital expenditure base.
“We are not there yet but we are heading in that direction,” he said.
Goeller said there are reasonable demand growth prospects for cement, and if there isn’t a huge amount of extra supply coming on line, the demand side is likely to grow relative to supply for the next couple of years.