Key message: The cement market is very weak. Short term relief depends on
government intervention (tariffs, infrastructure program). PPC’s balance sheet is
under pressure but not in trouble, but debt restructuring negotiations
continue.
- Cement market
- Cement volumes were down approx. 15% in 2019, although official stats suggest an 8% decline (cement data is hard to get these days – but anecdotal evidence supports the 15% down number).
- Overall industry capacity utilisation (of efficient capacity) is around 65-70% (PPC has efficient capacity if 5.2mtpa).
- December 2019 was very weak with bad weather and construction sites closing early, but Jan and Feb 2020 has seen some recovery.
- Mgmt. see the cement market volumes flat at best in CY20.
- Prices have improved by approx. 8% YoY, but mgmt. see no scope to increase bag prices in the near-term. Competitors pricing has pulled back from mid-last year (there were large increases of approx. 8% in early 2019 and a carbon-tax related increase of 2-3% in mid-2019).
- Bulk prices may be increased slightly.
- Imports (1.2mt in CY19) – PPC continues to engage with the Dti on cement tariffs. The Dti has recently requested more information. Mgmt. believe they have a strong case but would not speculate on chance of success or timing.
- Blenders (1.6mt in CY19) – PPC continues to push for quality standards and regulatory intervention. PPC has targeted Gauteng with a “fighter’ brand with prices at around R55/bag. (Sephaku is doing something similar in KZN). Some blenders are under some pressure apparently, but the root cause remains cheap OPC (available from AfriSam and Lafarge).
- In competitive news, Lafarge is going through a process to sell its South African assets. Some bids have been received (Afrimat, Chinese). The Afrimat bid has apparently been rejected. Mgmt. believe that a Chinese player entering the market would not necessarily change the competitive dynamic – the party concerned is known to mgmt. and they are rational players. The current Lafarge plant has been very unreliable and dependent on blenders as a large source of demand – new owners may take a more pragmatic view on supporting blenders.
- Cement South Africa
- PPC continues to rationalise production and is only running 1 kiln at Dwaalboom and Slurry. In the W Cape De Hoek is running but Riebeek is running only when required.
- Revenue expectations are guided by 15% volume decline and 8% price increase for FY20.
- EBITDA margins are unlikely to improve from 14-15% in the current environment. EBITDA in 2H20 is likely to at least match 1H20.
- Cement Zimbabwe
- Price increases have been kept in line with inflation, and EBITDA margins are around 35-36%.
- Volumes are down but mgmt. state that the market is now relatively stable. Hard currency is available to cover all internal costs (Zimbabwe in not costing PPC hard currency – it can be ringfenced from a cash flow point of view). Accounting for the Zimbabwean operations remains a challenge though.
- Cement Rest of Africa
- Rwanda – remains profitable although some imports are coming in from Tanzania. The Rwandan government is still wanting to sell its stake – an IPO is an option for them to exit.
- Ethiopia – a new CEO is in place with significant focus on an operational turnaround. PPC is looking for a local partner to replace the many individual shareholders. Pushing for a majority stake is of lesser importance to finding a local partner.
- DRC – the market remains weak, but stable from a competitive point of view. The EBITDA margin is between 20-25% at an approx. 30% capacity utilisation.
- Lime
- The closure of Saldanha Steel has had implications, but the division has been able to sell more lime to AMSA and found other markets to mitigate the volume loss.
- Aggregates
- Volumes are down approx. 15%. Mgmt. are comfortable that Pronto Readymix makes strategic sense in the mature Gauteng market, and the performance is acceptable given the market conditions.
- Debt
- PPC continues to look at extending the capital holiday in the DRC – this process needed to be revisited post the departure of the previous CFO.
- On the question of a rights offer – PPC are not planning to raise capital and maintain that all countries are sustainable individually from a debt point or view.
- PPC is in discussions with local lenders to extend the debt maturity of current debt. Debt covenants are not being tested, and lenders are still amenable to debt restructuring (as opposed to the construction sector where credit exposure was cut significantly causing major liquidity issues).
- However, PPC remains at the mercy of lenders who have shown in other sectors that rolling of current debt is not a given. This process has been going on for some time – some progress needs to be seen otherwise liquidity concerns will remain.
- Other financial
- Capex for the next 2-3 years will be mainly maintenance with no significant expansions planned.
- Impairment possibility – PPC is have discussions with auditors and plants like Dwaalboom and Slurry may face impairment pressures. Auditors have become very conservative on impairment measures it seems.