When a company is least desired by the market, it’s often most attractive to long-term investors. Cement supplier PPC is a case in point. The company has just released its worst set of results in 16 years, and its stock has slumped more than 26% over the past year. We believe PPC’s fundamentals are not reflected by its current share price, however, and the company may yet outperform the market over the long term.
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.’
We can assist you with
Discretionary investment management
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
Outsourced investment service
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.