Cement producer PPC has had a spectacular fall from grace over the past few years, but the more immediate question is whether the company offers investment opportunities at its current bombed-out levels.
The group has been downgraded by S&P Global Ratings because of its capital deficiencies, though liquidity levels are regarded as adequate. The group has cash of R813m at present, sharply down from the R1.14bn it had in 2015.
The recent interim results to end March indicate that the tide may be turning, with revenue stable at R4.5bn and cost of sales rising by only 2%.
Group cement revenue declined 1% to R3.7bn while earnings before interest, tax, depreciation and amortisation (Ebitda) were down 2% to R972m. Consequently, the Ebitda margin remained flat at 26.3%.
Some of PPC’s African expansion projects look promising, though overall volumes dropped in Zimbabwe and Botswana. Its recently commissioned plant in Rwanda is generating 124,000t in cement sales.
However, the more positive elements of the results were overshadowed by a disclaimer from PPC’s auditor, Deloitte, saying it was unable “to draw a conclusion on PPC’s ability to continue as a going concern”.
Group debt remains an albatross around PPC’s neck.
Despite strenuous efforts to improve the situation, group debt rose a further R2.4bn to R9.17bn over the period. It is expected to rise to R12bn next year.
PPC’s market cap is R4.6bn.
The reduction of debt remains crucial to an improved investment case.
Results so far have been mixed. The group was unsuccessful in postponing a bond redemption of R1.6bn, meaning that debt levels remain under pressure.
Management would prefer not to redeem it now. CEO Darryll Castle says the acceleration of a new capital raising and rights issue is necessary following S&P Global Ratings’ downgrade of the group.
“An extended bond redemption would have paved the way for the company to focus its efforts on implementing its strategy,” he says.
The group’s proposed rights offer of R4bn has been met favourably by analysts.
Momentum SP Reid analyst Sibonginkosi Nyanga calls it a “milestone” for the group.
“Standard Bank’s underwriting commitment of R4bn paves the way for the company to resolve its capital structure issues effectively,” he says.
Shareholders and investors have yet to warm to the new dispensation.
They are understandably sceptical, after the widely publicised corporate governance issues which led to the resignation of CEO Ketso Gordhan in September 2014.
PPC’s share price has not had a positive year since 2012, when it reached R36.50.
It started to retreat in 2013 and lost 44% in 2015. This year the share price hit a low of R6.80 and is still 50% off at R7.65, but appears to have hit bottom at these levels.
Nyanga believes that if the rights issue is successful, PPC will have derisked completely as debt worth at least R3bn will be paid down immediately, leaving the company lightly geared.
“PPC is fundamentally operating well despite difficult market conditions,” he says.
But even at present levels, with the company trading at a low p:e of 7.6, it is regarded as fully valued, indicating the vastly overvalued levels it was trading at earlier.
This makes PPC an uninspiring investment case.
But that could change if the group successfully addresses its debt issues.
source" Financial Mail