Johannesburg-based cement producer PPC is a market leader in South Africa, supplying about a third of our country’s cement needs. It has a presence in Botswana, Zimbabwe, Ethiopia, Rwanda and the Democratic Republic of the Congo (DRC). PPC also produces aggregates, lime and ready-mix.
At the end of March this year, the cement maker reported a 93% drop in full-year earnings. The results include a cash call of R4 billion on investors after an ‘unexpected’ S&P Global Ratings debt downgrade required the company to repay bondholders immediately.
If one can look past the poor headlines – only 7c of headline earnings per share – and focus on other aspects of the results, there are positive signs that lead us to believe the PPC share is undervalued and presents a good investment opportunity. The capital investment cycle has peaked and the multi-year plant building is winding down, which will lead to greater cash flow and lower debt. This will positively impact valuation of the company.
Another plus point is that import duties imposed in the SA market have led to significantly reduced volumes of Chinese and Pakistani cement arriving at our ports. Investors are on balance currently clamouring to get out of Africa. However, we believe the market is placing too much emphasis on PPC’s geographic exposure on the continent instead of focusing on its ability to generate cash flow. Also, perhaps it’s not so crazy to believe investing in African cement will become popular again. The Rwandan and Ethiopian economies are bright spots in Africa, growing in excess of 5% over the last few years. The DRC, Zimbabwe and South Africa remain tough places in which to operate but we believe this is reflected in the share price.
The market continues to focus on the worst-case scenario for PPC. The debt downgrade and an ensuing rights issue, and a public spat between the previous CEO and board, have led to investors taking a particularly short-term view with regard to the stock.
Along with the rest of the market, we’re acutely aware of the risks associated with the PPC share – but we also believe the risks are more than adequately accounted for in the share price. In our view, taking a through-the-cycle-approach and with the luxury of time on our side, PPC could well be an investment that outperforms the market over the long term.
It would be prudent to remember the words of Czech-Canadian scientist and policy analyst Václav Smil: ‘The world now consumes in one year nearly as much steel as it did during the first post-World War II decade, and (even more incredibly) more cement than it consumed during the first half of the twentieth century.’
