Sephaku is one of the companies affected by the sluggish economic conditions in SA. It has a 36% stake in Dangote Cement SA, which manufactures the Sephaku Cement brand, and owns 100% in Métier Mixed Concrete.
The ready-mixed concrete business in SA has not exactly thrived in the past few years given the backdrop of poor economic conditions and poorly performing state-owned enterprises. Macroeconomic expenditure in construction has been on the decline for some time now and this has taken its toll on the sector as a whole.
Impressively though, even with all these headwinds, Sephaku has managed to keep its earnings for the past financial year relatively flat at R44m with headline earnings a share actually increasing from 20.92c to 21.08c a share.
Much of this stability is thanks to the group’s determination to pay down debt. Since 2015 it has paid off about R1bn, resulting in a total outstanding debt bill of R1.65bn. What is concerning is that current debt covenants are under pressure as earnings before interest, taxes, depreciation and amortisation are lower than targeted.
Some encouragement comes from the fact that over the past financial year the group’s cash balance rose from R413m to R508m, which indicates the company is generating adequate amounts of cash to service its debt aggressively.
The company, much like the industry, is in survival mode at the moment as it tries to cut expenses wherever it can.
Its goal is to reduce expenses from the current R22.9m a year to R18.4m by the end of March 2020.
A challenge here will be the implementation of carbon tax, which came into effect this year on July 1.
But Sephaku, which expects it will need to pay somewhere between R35m and R40m in carbon taxes, has passed these additional costs on to consumers by adding it into annual price increases.
The extra costs account for 1.5%-2.5% of the higher prices of 4% to 6%, depending on the strength of the concrete and carbon-based pollutants involved in its manufacture.
How this will affect sales is still to be seen. Coming into this current financial year the company expected sales to decrease by 5% to 10% because of the depressed conditions.
Overall, it’s not a pretty picture, though the group’ ability to keep earnings relatively flat while paying down debt and cutting costs may indicate that it could be well-positioned when the economic cycle eventually turns. Further, the company’s close association with Dangote Cement means that if things get really tough it could potentially come to the company’s aid.
Sephaku could weather the storm and turn out to be a great undervalued stock — the current NAV a share is at about R4.17. But the stock is not very liquid and thus extremely volatile, often moving more than 15% a day (perhaps not all that surprising, as the share price is under R2).
I am not confident enough to give a strong "buy" recommendation for this share, so a "hold" will have to do for now — but watch closely for signs of confidence recovering and fixed capital investment in SA returning.
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