Key message: Impressive EBITDA expansion continues with the new RK3 plant due to boost margins even further.
- PPC released 1H FY26 results. HEPS increased by 15% to 25c on a 6.2% and 23.5% increase in revenue and EBITDA respectively. Adjusted for unrealised foreign exchange losses on the hedge for the new RK3 plant HEPS increased 32% to 29c.
- Key takeaways from the result: Margin expansion in the South Africa & Botswana division continues to be impressive, with the EBITDA margin increasing to 17.5% (from 13.7%) driven by operational efficiencies, a decline of 1.8% in cost of sales and a reduction in administration costs. Logistics costs have also been reduced substantially. Sales volumes in the region increased by 2% and revenue increased by 2.4%, with EBITDA increasing by 30.5% due to the margin expansion. Management expects the EBITDA margin to increase to 20% in the forecast period, and then the impact of the new RK3 kiln should boost margins even further. A second kiln at Slurry has been activated due to increased demand.
- The impact of the new R3.1bn RK3 kiln in the W Cape will be significant due to the approx. 30% savings in fixed and variable costs. The project is on track to be commissioned in December 2026 with first clinker produced in 1Q CY27. The new RK3 plant could boost SA & Botswana EBITDA margins by at least 5%, in our opinion. The plant will be able to increase the geographic footprint into the E and N Cape.
- The Zimbabwe operations continue to see strong demand with a 25% increase in sales volumes, assisted by a 30% import surcharge from May 2025. The Colleen Bawn plant is undergoing a 3-year programme to improve production and efficiency, and an extended shutdown was taken as part of this programme. The need to import clinker at a higher cost impacted margins in 1Q. A US$20m dividend was declared of which US$12m was paid. The US$30m land sale is still subject to milestone events.
- PPC has demonstrated remarkable earnings growth in a flat cement market, with further margin growth expected. A focus on contribution margin has led to a philosophy to hold prices rather than chase volumes which, while upsetting some customers, has not led to market share losses.
- We roll our valuation to FY27 and increase our Target Price to R6.80 (from R5.90). PPC is well positioned to benefit from any increase in cement demand with ample spare capacity available at little extra cost.