Key message: We look at FY21 potential earnings as lockdowns ease. A loss at
the HEPS level is likely, but debt covenants are not breached.
- PPC has delayed reporting FY20 results to no later than 31 August 2020. In this report we adjust our FY21 forecasts to reflect what we know about the lockdown impact on cement demand so far. We do expect that cement demand will fall by approx. 30% in CY20.
- The volume impact is mitigated somewhat by PPC as they fall back on the Mega-Plant option – operating only the efficient Dwaalboom, Slurry and De Hoek kilns. This should help to reduce operating costs and cushion the anticipated margin decline.
- Cement imports in South Africa may abate due to the Covid-19 impact on global supply chains, but this would only be temporary. The cement industry continues to lobby for import protection – should this be implemented it would provide an immediate boost to local integrated producers.
- On our numbers PPC does not exceed debt covenants – although it close to the 3.5 times gross debt/EBITDA in FY21 (3.3 times). The margin for error here is slim. Debt concerns will continue to hang over PPC. The DRC debt is still in the process of being restructured to push the capital holiday out to January 2022. An equity partner is some of the African operations is a possibility.
- Restructuring of AfriSam’s debt (a large debt for equity swap) was concluded, resulting in AfriSam now able to focus more on operations. This may stabilise the cement market – AfriSam has been a key supporter of the blender market as it had to push volumes under the previous restrictive capital structure. Lafarge SA has also seen a refocus after an aborted sale attempt.
- The government response to the economic slowdown caused by Covid-19 remains key to PPC’s short-term prospects. Support of local industry (import tariffs) and infrastructure spending would be a boost to the cement sector.
- PPC’s assets have been better maintained then its competitors and it remains well placed competitively in South Africa. Recent management changes have been positive.