PPC shares crumble on warning

Shares in Pretoria Portland Cement (PPC) slumped by 3.7% to R25 yesterday, their lowest level since 2005, after the listed cement and lime producer issued a negative trading update.

PPC said cement sales were continuing to decline and difficult trading conditions were expected to result in the company reporting a more than 30% decrease in its financial performance in the six months to March, compared with the previous year. It said industry cement figures released for the five months to February this year showed a cumulative decline in cement sales of 6.5%. Quentin Ivan, an analyst at Coronation Fund Managers, said it was a poor result but was not completely unexpected as the company had issued an investor update last month indicating the consensus estimates for its earnings were too high and cement volumes were still declining. Ivan said the stock market was up 0.6% yesterday but PPC’s share price was nearly 4% lower at about the same level at which it was trading in 2005.

PPC’s share price hit a high of R51 a share in mid-2007. But Ivan said it was misleading to look only at PPC’s share price because it paid special dividends and higher dividends than the market. Although relative to the market, PPC’s share price had underperformed over the past two or three years, there was a need to look at the total return, including capital appreciation and dividends. He said PPC had experienced enormous cost pressure and was unable to recover these costs because the cement market was so weak.

Ivan said cement was 90% of PPC’s business but its other divisions were quite important and also struggling. Its aggregates unit supplied directly into the construction industry and was performing poorly, in line with the construction market, while the lime business provided product to the steel industry, where volumes were also under pressure. Ivan stressed the stock market was forward looking and although PPC generally traded at a premium to the underlying market, the demand for cement was weak and a significant amount of additional cement capacity would be coming onto the market in the near future, which would make the market much tougher.

A joint venture, including leading Chinese cement group Jidong Development Group, the China- Africa Development Fund, Women Investment Portfolio Holdings and South African limestone mining company Continental Cement, are investing R1.65 billion in a new cement manufacturing plant in Limpopo north of the town of Brits, while Sephaku Cement is establishing two cement plants in North West and Mpumalanga at a total cost of R3.3bn that will be commissioned next year. Ivan said PPC had responded to this and scaled back its expansion plans at Riebeeck West in the Western Cape and would retire older cement kilns to keep cement supplies to the market tighter. Ivan said even if the cement market recovered, there was likely to be an oversupply in a few years time.

He doubted it was rational for new supply to come into the market and it was unlikely these investments would earn a proper return. But it was too late to reverse these investment decisions and the new plants would come on stream. Ivan said PPC’s management was acutely aware of these issues, which was the reason it was retiring old plants and looking at other opportunities, such as acquisition opportunities in other parts of Africa and other emerging markets.

PPC is expected to release its interim results on May 17.

click to enlarge