Key message: We examine the ability of PPC to withstand current weak markets and do some scenario analysis around debt covenants. We conclude PPC still has a robust Southern African operation able to withstand even weaker markets before covenants are tested.

  • Cement demand in South Africa appears to have fallen approx. 15% in 2019, with similar declines in ready-mix and aggregate markets. This has resulted in PPC’s EBITDA margin to fall to below 15% (margins peaked over 30% during the pre-2010 construction boom).
  • Cement prices did increase though as producers tried to stem a multi-year price erosion. Prices increased 8-10% through the year, although it is unlikely there will be further price increase in 2020 given the weak demand.
  • The cement market continues to be negatively impacted by cement imports (1.2mtpa) and blenders (1.6mtpa). These two now account for approx. 22% of total cement demand currently estimated at 11.8mt.
  • The outlook for FY21 is not very good – with GDP growth likely to impacted by the global coronavirus impact it is unlikely that volumes or prices will see any growth in FY21.
  • However, keeping those variables flat PPC remains within debt/EBITDA covenants and should be able to weather a short-term coronavirus impact.
  • The only catalyst in the short-term is government intervention on imports (general tariffs) and blenders (applying SABS standards rigorously). Either of these could have a significant short-term positive impact on volumes for PPC.
  • Our fair value for PPC is R3.25. The market does seem to be pricing in a capital raise and it is trading well below fair value, in our opinion. A recommendation under this scenario is fraught with risk, but we would be long-term buyers as PPC remains a well-maintained operation in a market that has faced many headwinds for several years.

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