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PPC’s planned equity raise under review, pushed out six months

Follows the group resolving its $175m DRC debt exposure and reducing the debt on its SA balance sheet.
Revenue is up primarily due to strong cement demand in South Africa. Image: Waldo Swiegers, Bloomberg

The planned equity capital raise of at least R750 million by JSE-listed cement and lime producer PPC to degear the group’s South African balance sheet has been placed under review and the timing pushed out six months to end-September 2021.

This follows PPC’s South African lenders agreeing to defer by six months the timing of the capital raise, which was initially planned to take place by end-March.

PPC said on Wednesday its South African lenders have also agreed to review the need for the capital raise should the South African businesses continue to degear towards a sustainable debt metric of about two times earnings before interest, tax, depreciation and amortisation (Ebitda).

The planned equity capital raise, which was subject to the resolution of PPC’s $175 million senior debt exposure in the Democratic Republic of Congo (DRC), was among the undertakings given by PPC to its South African lenders in August 2020.

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PPC reported on Wednesday it has resolved the group’s exposure to the senior debt in PPC Barnet in the DRC through a settlement agreement, with the restructuring of this debt to be completed by September 30.

Improved prospects

PPC CEO Roland van Wijnen said PPC’s management team has made significant progress in implementing a sustainable capital structure and improving the investment prospects of the group, including derisking the group’s balance sheet through the removal of its contingent obligations in relation to PPC Barnet.

“This provides clarity on what has been a significant overhang on the group and is expected to restore investor confidence in the group and free up management time to focus on core operations and other long term strategic initiatives,” said Van Wijnen.

Shares in PPC responded positively, rising by 18.23% on Wednesday to close at R2.40.

Peregrine Capital executive chair David Fraser said the PPC update is obviously very positive and PPC’s new management team has “managed to remove a millstone that has been around this company’s neck for the past two to three years”.

“A lot of the work they have done is to fix up the previous management team’s mistakes.

“It’s great to see an old South African industrial company starting to regain a bit of traction,” said Fraser.

“They have been in the doldrums for too long but I think it’s still an exciting story.”

Fraser said the key is the fact that South African gearing looks as if it is coming down quite rapidly and if PPC has another few months of robust trading, the debt burden in South Africa will quickly be broken down to “a very comfortable level of gearing”.

“I don’t see any need for a capital raise just as long as PPC gets another few months of trading like we have seen recently.

“I’m quite excited about PPC’s prospects,” he added. “Obviously the share price is responding well but I certainly think there is probably more to come.”

PPC reported that South African debt has reduced from R1.92 billion at end-March 2020 to R1.64 billion at end-February 2021 and group free cash flow for the 11 months to end-February 2021 is between 90% and 95% higher than the previous comparable period.

The group said that given the improved financial performance and reduction in gearing levels, it is in good standing with its lenders, with sufficient headroom in existing facilities to meet its operational requirements.

Positive factors

Van Wijnen said the group has experienced the positive impact of improved cement sales, cost reduction measures, enhanced working capital management and cash preservation measures implemented over the 11 months to end-February 2021.

“Double-digit period-on-period growth was experienced in cement sales from July 2020 to February 2021 despite new Covid-19 restrictions in certain markets.

“Our ability to respond to the strong increase in demand following the easing of lockdown restrictions at the beginning of the 2021 financial year has resulted in a significant improvement in the group’s financial performance,” he said.

PPC reported that group revenue increased by 7% period-on-period for the 11 months to end-February 2021 and 14% for the five months to end-February 2021.

It said this was driven primarily by strong cement demand in South Africa.

PPC said group Ebitda benefitted from increased cement sales and stringent cost control, increasing by 25% to 30% period-on-period for the 11 months to end-February and 45% to 50% period-on-period for the five months to end-February.

DRC settlement agreement

In regard to the DRC, PPC reported that it has entered into a settlement agreement with PPC Barnet’s lenders terminating their right to recourse to PPC Group and removing a potential liability of about $175 million from the group’s balance sheet and greatly enhancing its financial position.

This agreement will become effective once PPC pays a final deficiency settlement amount of $16.5 million, which it expects to do in early April.

PPC has also agreed terms to restructure the debt in PPC Barnet, with it converted into a combination of reinstatement of senior debt and a pay-as-you-can preference share.

The group said these agreements derisk PPC from future economic downside risk to the DRC operations and effectively direct the economics of the business to the PPC Barnet lenders.

PPC will manage the business on behalf of the PPC Barnet lenders under a management agreement for an initial five-year term for a fee, enabling PPC to recover its costs over the term of the contract.

PPC will retain both an ordinary equity and preferred equity interest in PPC Barnet.

The group added that the structured sales process for PPC Lime continues to make good progress, with shortlisted parties having completed due diligence and binding offers expected to be received by early April.

PPC said it will assess these offers in the context of shareholder value creation and targets, and should any of the offers be acceptable, enter into definitive sale agreements by the end of May.

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