Sephaku: Built to last

For more than a decade, South Africa’s construction and cement industry has existed in a state of suspended animation. Growth flattened, confidence evaporated and investment retreated so deeply that it appeared structural.

Between 2014 and 2024, the country managed average GDP growth of only 0.8% — its weakest performance in democratic history. Fixed investment, once near 20% of GDP in 2015, fell to roughly 13% by 2021. Public sector capital expenditure, having peaked at R283bn in 2016, declined by almost a fifth in the following years.

Cement demand did not collapse, but it slipped into a long, muted downturn. Annual consumption, which had sat above 15Mt, drifted down to about 12Mt-13Mt as confidence ebbed and project pipelines thinned. Ready-mix plants ran well below efficient utilisation, contractors parked and mothballed yellow metal and regions that should have been construction hubs saw postponed tenders, shelved schemes and half-funded plans.

Sephaku Holdings sat directly in the path of this storm and felt every tremor. Subsidiary Métier’s ready-mix division endured years in which plant utilisation sank well below efficient levels, often drifting under 60%, as work dried up. Pricing power eroded under the twin squeeze of weak domestic demand and rising import competition. Energy inflation was relentless: regulated diesel prices climbed from roughly R15 per litre in the early to mid-2010s to well above R20 at points in the early 2020s, and Eskom’s tariffs compounded at well into double-digit rates over multiple regulatory periods.

The result: stripped margins and crushed operating leverage, with many producers facing financial strain that only the most resilient balance sheets could endure.

Sephaku, though, demonstrated something investors consistently underappreciate: hard resilience. Across a 10-year stretch of near-unbroken sectoral contraction, the company remained profitable in nine of those years. Only the extraordinary conditions of 2020 — the full national lockdown — produced a loss. By 2023, earnings were rising. By 2025, revenues reached R1.18bn and net profit exceeded R73m.

Public infrastructure spending surged by 10.9% in both 2022 and 2023, marking the most robust two-year rebound since before the industry downturn

At the release of the interim results, CEO Kenneth Capes said that while subsidiaries Métier and Sephaku Cement (SepCem) have not yet seen a material recovery in overall construction demand, retail bag sales have shown improvement. He added that the operating environment is expected to remain subdued in the second half of the financial year.

But the true turning point lies in the marked shift of the operating environment that previously suppressed the sector. Public infrastructure spending surged by 10.9% in both 2022 and 2023, marking the most robust two-year rebound since before the industry downturn. Major initiatives — such as developments in water infrastructure, road corridors, sanitation upgrades, new industrial nodes and foundational work for renewable energy — have re-entered the active project pipeline.

Sephaku emerges into this renewed cycle as one of the sector’s few operators with undiminished capacity, an established brand presence and a decade’s worth of cost discipline deeply embedded in its operating model.

Now, for the first time since before 2013, infrastructure spending is rising from a historically depressed base. Import viability is falling under the combined influence of port congestion, tightening border enforcement and an unambiguous state preference for local procurement. And interest rates, having peaked, have begun shifting market psychology. Developers who viewed the past three years as unworkably expensive are re-examining postponed projects as financial feasibility improves.

These shifting forces are not theoretical; they are already visible inside Sephaku’s operations. Over the past 18 months, Métier has supplied growing volumes of ready-mix to road upgrades in Gauteng, logistics hubs along the N3 corridor and some of the largest affordable housing developments in KwaZulu-Natal. SepCem’s bulk cement deliveries have increased, supported by wind farm foundations in the Eastern Cape, solar installations in the Northern Cape and expansions across Gauteng’s industrial belt. These are not speculative “green shoots”; they are real demand anchored in real projects and real revenue.

One of the most decisive changes in the sector is the government’s requirement that publicly funded projects use locally produced cement. Water projects in Mpumalanga and Limpopo, road rehabilitation in Gauteng and renewable energy projects with significant foundation requirements are all now powered exclusively by domestic supply. The policy not only protects local producers — it structurally reshapes the competitive arena by securing market share, stabilising utilisation and restoring pricing integrity.

Imports, meanwhile, no longer behave as they once did. South Africa’s congested ports have made large-scale import flows erratic. Anti-dumping efforts are gaining force. Border inspections are firmer. Hardware retailers that once stocked cheaper imports have shifted back to local cement after customer complaints regarding inconsistent strength increased the risk of returns.

When imports recede, prices normalise upward. For a producer like Sephaku, with considerable fixed-cost leverage, each R10 improvement in average realised price flows almost entirely to operating profit.

The industry’s decade of energy inflation obscured the fact that Sephaku used the crisis years to fundamentally reshape its cost base. Fleet optimisation reduced diesel intensity. Logistics routes were redesigned to reduce kilometres per load. Plant reliability and energy efficiency improved through reinvestment. Clinker ratios fell through the expanded use of ash extenders — improving both sustainability and cost.

As energy markets normalise, these structural gains translate directly into ebitda expansion. That is why ebitda has risen from R19m in 2020 — arguably the worst year in South African construction history — to R146m in 2025, an increase of more than sixfold.

Behind Sephaku’s execution sits a board unusually sophisticated for a company with a market capitalisation below R450m. It includes Harvard-educated chair Brent Williams, who leads one of the country’s most prominent law firms; CFO Neil Crafford-Lazarus, who was trained in the capital-intensive environments of Anglo, Xstrata and BHP; and a CEO in Capes who has more than 35 years of operational mastery in aggregates and concrete.

In small-cap investing, governance quality is one of the strongest predictors of valuation rerating because it governs capital allocation, risk discipline and strategic clarity. Sephaku’s governance is institutional in a segment where this is rare.

A consideration is why top investor David Fraser, chair of Peregrine Capital, recently snapped up a significant minority stake in Sephaku. The valuation gap is where Fraser’s conviction becomes most visible. At a market capitalisation of roughly R445m and a net profit of R73.6m, Sephaku trades at an earnings multiple of just 5.2 — a level more commonly associated with distressed or ex-growth companies than with firms whose earnings are rising, margins are expanding and operating leverage is strengthening.

It implies an earnings yield of 19.2%, meaning an investor buying the entire company at today’s market value would, in effect, be earning a 19% annual return on current profits alone. That number dwarfs South Africa’s inflation rate of 3.6% and still comfortably exceeds the 10-year government bond yield of 8.6%, which represents the economy’s long-term risk-free benchmark.

Put differently, Sephaku’s earnings yield is more than five times inflation and more than double the long bond, despite the company holding real assets, embedded brand equity, a nationwide operating footprint and participation in a sector entering the early phase of a recovery.

No rational valuation framework — whether one relies on replacement cost, midcycle multiples or discounted cash flow — supports a scenario in which a profitable, asset-rich industrial trades at such a steep discount to both its earnings power and its strategic position.

Fraser’s position is a direct rejection of that narrative. He is betting that yesterday’s conditions are not tomorrow’s reality. He sees a company whose fundamentals, competitive position and cycle exposure are improving at the same time its valuation remains anchored in the pessimism of the past decade. In the language of value investing, this is the rare moment when sentiment diverges dramatically from intrinsic value.

The market still sees a commodity business in a stagnant sector. Fraser sees a resilient operator entering the first genuine upcycle in more than 10 years — still priced as if the downturn never ended. And in markets, it is often that misalignment, rather than perfection, that creates the greatest returns.