PPC lays cornerstone for African expansion

Pretoria Portland Cement Ltd (PPC) shares have risen just over 3% since the company released its annual results yesterday. However, the performance of the stock may have more to do with investors’ confidence in the company’s future strategy than its recent performance.

Though revenue climbed just under 8% to R7.35bn in the 12 months to end-September, per share earnings dropped almost 2% to 161c/share. Still, it wasn’t a bad set of financials given the gloom in the construction sector and the wildcat strikes that have plagued PPC’s mining clients. A final dividend of 146c/share would’ve also helped to allay any potential investor concerns.

PPC is also pressing ahead with plans to expand its presence throughout sub-Saharan Africa, which will see revenue earned from the rest of the continent almost double from a current 21% of overall sales to 40% over the next four years. After finalising its acquisition of a 27% stake in Ethiopia’s Habesha Cement, PPC is currently targeting another four African countries for potential acquisitions, according to chief executive officer Paul Stuiver.

“In principle the intention is to expand right across sub-Saharan Africa, but it’s just too big and complex to tackle all at once,” Stuiver told Finweek. “Right now we’re looking at four solid opportunities.”

A PPC investor presentation shows that the company has essentially divided its African expansion strategy into two parts: 1) a current area of focus targeting the continent’s Eastern Corridor and 2) a longer-term development path that extends from Angola through the Congo, right up the West African coast as far as Senegal. A big reason for focusing on East Africa first is the fact that English is more widely spoken in the region, while Nigeria’s Dangote cement, Africa’s biggest producer of the building material, is also less active there.

Stuiver declined to name the four countries in which PPC’s “solid opportunities” are located, but did venture to say that South Sudan, Zimbabwe, Mozambique, Zambia, Rwanda and Burundi were all on the company’s radar. What he did say is that PPC plans to double the size of the Habesha business in Ethiopia over the next two years. This will largely be done through the 1.4m ton cement plant being built on the outskirts of Addis Ababa, which on its own will take non-SA revenue to 26% (from a current 21%).

“In the long term we’re not happy with minority stakes but we’re happy to be minority shareholders when there’s a path towards achieving a controlling stake,” said Stuiver. “We fully expect to double the size of the Ethiopian business over the next two years but to do so will require capital. That’ll give us a chance to bump up our 27% stake in Habesha.”

Stuiver says funding the expansion in Africa will largely be done by using “clever financing” to leverage PPC’s current balance sheet capacity of $300m to give it a total war chest of between $600m and $700m for potential acquisitions. In simple terms, he says the plan is to target up to four projects of just over $100m each, with PPC likely to put down half the money in cash and the remainder funded through debt.

Closer to home, Stuiver says cheap imports from Pakistan, India and Vietnam are becoming a headache, especially since some of the bags from these countries are now sporting the SA Bureau of Standards stamp of approval, even when no endorsement from the quality authority exists. While PPC estimates that roughly 80% of cement imports from these countries are entering South Africa via Durban, and are hence more of a problem in KwaZulu-Natal where PPC is less active, he says they are beginning to crop up in other parts of the country.

“It’s definitely starting to become a problem and perhaps there’s a dumping case to be made,” he says. “It’s something we’re looking into at the moment.”

It could be Stuiver’s parting shot before he retires at the end of this year, when he will be replaced by Ketso Gordhan. The fact that the incoming CEO just happens to be the nephew of Finance Minister Pravin Gordhan, coupled with stints in the presidency and ruling party machinery, will hardly hurt PPC’s chances of some form of benefit when Government finally gets around to spending the R850bn earmarked for infrastructure projects over the next few years.

Paul Theron, chief executive officer of Vestact, certainly seems to think Gordhan offers more than just Government connections. Gordhan junior is, after all, the former head of private equity at FirstRand, where he worked for almost a decade.

“He’s certainly a clever and creative guy who is known to be extremely hard working,” says Theron. “He’ll bring fresh energy.”

Nevertheless, Theron is less convinced in PPC as an investment case, particularly for retail investors. While he acknowledges that the firm’s African expansion strategy does have merit, he cautions that it will take a long time before the strategy begins to bear fruit. In the medium term it may also weigh on PPC’s shareholder distributions.

“If they need to commit significantly to capital expenditure in Africa it could affect their ability to pay dividends,” says Theron, adding that Vestact doesn’t currently hold PPC shares. “The stock is also prone to the peaks and troughs that are typical of the sector, so while we wouldn’t say that one shouldn’t hold them, we’re not sure that it’s a share for the man in the street – or his wife, for that matter.”

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