Sephaku cements a surprise

SA’s cement sector is far less brittle than it was a year ago. The share price of market leader PPC has rebounded 230%, bearing testimony to the better industry fundamentals.

While PPC’s operational improvements and debt-culling efforts have occupied centre stage on the JSE, few investors might have realised that smaller cement player Sephaku has managed an even more startling comeback. Over a year, Sephaku’s share has surged almost 600% from an early July low of 25c to current levels of 174c.

The company owns Métier Mixed Concrete and a 36% stake in SepCem, which is 64% controlled by Nigerian firm Dangote Cement.

A year ago Sephaku looked down and out. In the half-year to end-September 2019 Métier’s lower profits caused debt covenant pressure, and the company admitted it was a challenge to refinance the full R100m revolving credit facility payable in April 2020.

To ease Métier’s balance sheet pressure, Sephaku aimed at a partially underwritten rights offer of R50m. This was later reduced to R39m, which was only 43% subscribed in early 2020, with the balance of the capital raising taken up by underwriters Safika Resources. The pitch price was 81c a share, but in subsequent months the Sephaku share price crumbled.

While the response from most Sephaku shareholders was underwhelming, large asset manager Allan Gray — which spoke for 40-million shares — followed its rights. And those that snaffled shares at under 25c in the early parts of 2020 have been richly rewarded.

In the year to end-March 2021, Sephaku produced net profit of R20m (from a net loss of R17m the previous financial year), which translated into earnings of almost 8c a share and headline earnings of 6c a share.

Sephaku CEO Neil Crafford-Lazarus says the uncertainty of the initial phase of the Covid lockdown led the group to negotiate with lenders to amend its debt repayment terms.

"I am pleased to confirm that we successfully provided the prerequisite capital injections for both Métier and SepCem to enable the lenders to suspend capital repayments for nine months and five months respectively of the 2021 financial year," he says.

He says Sephaku was pleasantly surprised by the surge in bagged cement demand in the post-hard lockdown phase — an unexpected result of additional consumer discretionary income.

"The rise in cement demand appears to be linked to increased home renovations as numerous people worked remotely during the year. The increase in the sales of other home improvement materials as reported by the major building materials merchants confirms this possible trend."

But Crafford-Lazarus notes the unit price increase was muted due to competition from other cement producers, blenders and imports.

Though Métier showed lower sales revenue of R634m (2019: R727m), earnings before interest, tax, depreciation and amortisation (ebitda) came in markedly higher at R55m (R35m) on a much reinforced margin of 8.7% (previously 4.8%). Crafford-Lazarus says the pandemic accelerated the implementation of the restructuring process to ensure that Métier emerged a lean and profitable business by the end of the financial year.

SepCem, in the year to end-December, reported increased sales revenue of R2.4bn (previous year R2.2bn) and also improved ebitda of R382m (R359m) — though on a slightly skinnier margin of 15.9% (16.4%). But net profit after tax of R44m was well ahead of the previous year’s R1.3m.

The stand-out number, though, was Sephaku’s total costs, which dropped to about R12m from about R16.5m in the previous year. In the 2018 financial year Sephaku’s total costs were double, at R25m.

Sephaku, unlike PPC, is managing down its debt load without needing to sell off assets. The group reported the Métier term loan was reduced by almost a quarter to R71m. SepCem made debt repayments of about R450m to bring its debt load down to R1bn. This continues the steady process of reducing debt since 2015, when total debt at SepCem was a much more imposing R2.4bn.

SepCem is continuing to gain traction after the close of the financial year. Sephaku disclosed that first-quarter results to end-March yielded a sprightly revenue increase of 16% to R541m, with sales volumes up 6% on continued demand for bagged cement.

SepCem managed to put through a price increase of 6%-8% a ton. But Sephaku did warn that first-quarter profitability would be hampered by a scheduled annual kiln maintenance shutdown and a shortage of clinker.

Crafford-Lazarus says high cement demand in the second half of 2020 limited SepCem’s ability to accumulate sufficient clinker stockpiles.

He is bullish about the bagged cement uptrend, but cautions that a longer-term (growth) trajectory will need impetus from civil infrastructure.