JSE-listed cement and lime producer PPC is adamant it will only embark on a rights issue to raise between R750 million and R1.25 billion once it has resolved and restructured the unsustainable $150 million debt of its DRC subsidiary.
PPC CEO Roland van Wijnen said on Friday: “No resolution, no rights issue.”
PPC successfully raised R4 billion in a rights issue in 2016.
The company added that its lime business is a non-strategic asset and it plans to dispose of it and other non-core assets.
A group-wide restructuring will also result in PPC having about 10% fewer employees by the end of March next year.
Van Wijnen said the group, including its international subsidiaries, currently has about 3 000 employees. The first and foremost priority is the group capital restructuring.
He said PPC’s investment in PPC Barnet in the DRC is funded by about $150 million senior debt but the plant is not generating sufficient earnings to service this debt. PPC Limited in South Africa has an obligation to supply “deficiency funding” to PPC Barnet if requested to do so.
However, Van Wijnen said PPC has since late last year made it clear to the international lenders that a solution needs to be found that removes the dependency on the group and to establish a proper capital structure for its DRC operation and international business.
The CEO said the Covid-19 lockdown had created additional complexity, because the group’s South African lenders looked at PPC South Africa and the bleak outlook in April this year and asked the group to strengthen its balance sheet.
He said the group immediately implemented cash preservation measures and has renegotiated the arrangements it has with its South African lenders, while on the international side it is in the final stages of agreeing on “a standstill that will allow us to make a long-term restructuring plan and make that happen”.
“We need to raise equity in PPC International, of which the quantum and timing is to be confirmed. We expect to confirm that in early calendar year 2021.
“We will then have an international business that comprises our Zimbabwe, Rwanda, DRC and potentially other businesses independent from South Africa, each of them with appropriate balance sheets.
“Only then we will be looking at strengthening the South African and group financial position through a rights issue.
“That rights issue is the last step in the restructuring process and, as a consequence, the pricing of the rights issue will be at the time when the financial market no longer has the uncertainty it currently has around the situation in the DRC and the recourse that it has to the group,” he said.
Van Wijnen is confident about restructuring the debt in the DRC because PPC has a very clear understanding with lenders that the current situation is not sustainable, there is interest in the DRC as a growth market, and the alternative to not resolving the capital structure in the DRC “is worse than resolving it”.
He said PPC’s investment proposition remains to be a company with modern assets and leading market positions in high-growth markets throughout sub-Saharan Africa, but it needs to resolve the unsustainable capital structure in the DRC.
Van Wijnen does not believe that PPC divesting from its international business is on the radar – unless someone is willing to pay a fantastic price for them and PPC can deploy that money elsewhere.
He said Rwanda and the DRC generated about R325 million in total earnings before Ebitda in the 2020 financial year, compared with about R650 million generated by its South African operations, which probably has about six times more capacity than its investments in Rwanda and the DRC.
PPC on Friday reported a 124 cents loss in earnings per share in the year to March 2020, compared with the 16 cent profit in the previous year.
Restated group revenue declined marginally to R10.2 billion, while Ebitda slumped by almost 16% to R1.6 billion, which was largely driven by a reduction of activity in South Africa.
PPC reported total impairments of R3.074 billion in the year, including R1.9 billion in South Africa cement and readymix and R1.128 billion in the DRC.
Debt increased to R5.8 billion at end-March from R5 billion in the previous year, with R638 million of the increase due the currency impact with its offshore debt being denominated mostly in US dollars.
The group had international gross debt with recourse to South Africa of R2.7 billion at end-March.
Van Wijnen said PPC is operating in a weak macroeconomic environment, especially in South Africa and Zimbabwe.
He said PPC is faced with overcapacity in South Africa and the DRC, with both these countries experiencing increased competitive pressure and facing imports and non-conforming products.
However, PPC Cement South Africa and Botswana have experienced double-digit year-on-year sales volume growth since June, with the volumes for the three months from July to September recording year-on-year growth of 20% to 25%.
Van Wijnen said the international operations were less affected by the Covid-19 pandemic and in the three months from July to September, sales volumes in PPC Zimbabwe grew by 35% to 40%, in PPC Barnet in the DRC by 20% to 25% and in Rwanda by 15% to 20%.
He said PPC’s gross South African debt is benefitting from the improved cash flows the company has been generating, which it reduced to R1.8 billion at end-September from R2 billion at end-March.
Peregrine Capital executive chair David Fraser said Van Wijnen, chief financial officer Ronel van Dijk and Anthony Ball, the executive director focused on the capital restructuring, are “just fixing up somebody else’s mess”.
However, Fraser said he liked the new management team and was “very impressed” that PPC has reduced its South African debt by R200 million between March and September, when two or three months of this period was during the lockdown.
He said PPC seems to be making good progress with restructuring the debt in the DRC, adding the outcome it is looking for is a reasonable compromise “that everybody can live with”.
“The [share] price is definitely wrong. It’s either worth nothing or it’s worth 10 times what it is. The results of these negotiations will determine that.
“If you want a South Africa infrastructure play, there are not many places to go. It’s to an extent a little bit of an option play. But it’s not for widows and orphans. It’s got a health warning to it,” he said.
Shares in PPC rose 4.67% on Friday to close at R0.67.