Infrastructure companies need economic growth and commercial activity to prosper. South Africa is bereft of both, despite the enthusiasm that swelled with Ramaphoria and the GNU.
With a challenging fiscal position hamstringing any material capital expansion and the National Treasury scraping the VAT barrel to make ends meet, it’s no wonder investors have cooled towards building materials and infrastructure counters.
Year to date, PPC Group is down 22%, Raubex Group 25% and Cashbuild 27%, highlighting the sector dystopia among investors.
PPC, once a giant of the domestic infrastructure scene, shrank to a valuation dwarf. Expansionary misadventures into Africa, funded by shedloads of debt, saw the former top 40 staple crash to a share price of 48c in late 2020, amid investor concerns over the crushing debt pile and post-Covid weakness.
A period of pruning and asset sales resuscitated the business and saved it from the clutches of bankers, as the management of the day stabilised the cement and materials company and transformed its financial position. This led to a surge in the PPC share price, which rallied 1,200% to peak at 573c in late 2021.
What was not fixed was the underlying operational performance of domestic cement assets, where a bunker mentality led to a slew of mediocre results. A new management team was appointed in September 2023 under experienced global cement executive Matias Cardarelli. He blasted through the clubby, insular world of PPC with a plain-speaking transparency that has led to a revival of domestic cement and materials operations, lowered cost structures and, importantly, improved margin and profit.
Cardarelli’s mantra is “awakening the giant”. Initially, it sounded like glib MBA-speak, but his actions have spoken as loud as his words. A root-and-branch understanding of the weaknesses within PPC gave a clear picture of a business with potential, but with ingrained operating and cost complacency. That is changing.
The change became visible in the last set of results. Interim results to September 2024 saw the turnaround plan in action, but effects were yet to be fully experienced. Headline EPS rose 10% to 22c and an improved financial position, aided by the sale of a cement unit in Rwanda, resulted in a R521m special dividend.
The share price responded positively but skidded on January 16, when PPC announced a R3bn investment in a new 1.6Mt cement plant in the Western Cape to replace two elderly, costly plants in De Hoek and Riebeek. This capex splurge shook the market and the share price slammed 18%.
A widely attended PPC capital markets day clarified the fat capex. Cardarelli said that without lowering production cost structures within PPC, the “Chinese would eat the sector’s lunch”. The new R3bn plant would be the lowest-cost cement producer in South Africa, located in a region with economic growth.
Cardarelli dismissed as erroneous calls that additional cement capacity would aggravate oversupply, as “older plants, with high costs per ton” simply cannot compete. He believes South Africa will have three large cement players within five years and that PPC will be one of them, hence his drive to lower costs and improve efficiency and margin to “awaken the giant”.
The 10-month update in late March built on interim results, with management stating margin was ahead 3% to 15%, with a 20% increase in earnings before interest, tax, depreciation and amortisation despite continued softness in cement volume and demand. A confident push to a 22% margin target was planned by 2030, a near doubling from the FY2024 result. The market applauded the investor day update and PPC rallied 20%, with the Trump tariff drama bringing the stock back to 422c.
A confident push to a 22% margin target was planned by 2030, a near doubling from the FY2024 result
Despite an improvement in the metrics, much remains to be done at PPC. However, the corrective strategy is under way and starting to deliver market-pleasing results. What is beyond the control of PPC, and the cement sector, is economic activity and cement demand. The near-term outlook is not reassuring, with muted activity.
PPC Zimbabwe’s recent softness is concerning, given its meaningful revenue contribution and remittance of dollar dividends. This is needed to retain comfort on the R3bn debt. Cement imports and pressure from cheap blenders of cement also weigh. Management is attempting to galvanise the sector towards a cohesive set of cement standards while engaging with the government.
IM was heartened by the March update. The cogs are all turning in the right direction at PPC and with many competitive advantages in the bag and under way, alongside cost optimisation and market leadership, Cardarelli’s vision of recovery and growth seems tangible.
However, IM remains cognisant of the overall cement market. The sector has managed to increase pricing, but at the expense of volume. A sustained construction uplift and impetus from the GNU is desperately needed. Until signs of capital projects are seen, PPC, despite its prospects, will be held hostage to the environment. We place a hold on the stock with a target of 500c (+18%).
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