Paul Stuiver

Pretoria Portland Cement (PPC), South Africa’s biggest cement maker, plans to raise a further R3.2bn in debt to help finance an ambitious expansion across the rest of the continent as demand in its home market wanes.

Chief Executive Officer Paul Stuiver said in November last year that the company wants to boost the proportion of its revenue that comes from Africa north of the border to 50% over the next five years. That came after the contribution to revenue from the rest of Africa doubled in the past two years to around 20%.

“We have about R3.2bn in excess debt raising capacity which we can use for greenfields expansion projects,” Kevin Odendaal, PPC executive for investor relations and strategy, told Finweek in a 31 January phone interview. “We’re fairly confident we can access that amount through banks or other institutions. We aren’t considering bonds.”

Within limits

The debt-raising plan is in keeping with PPC’s policy of not allowing debt to exceed three times EBITDA. Given that the company currently has a net R3.29bn in long- and short-term loans, a reported EBITDA of R2.146bn in the 12 months to end-September 2011 would give it a further R3.2bn in acceptable gearing capacity.

Odendaal says PPC plans to utilise the money “on a project-by-project basis” by acquiring majority stakes in facilities that produce between 500 000 and 750 000 tons/year. With plants typically costing around $200 per ton of production, a single 500 000 ton plant could set the company back roughly $100m, or just under R800m. While that suggests the R3.2bn earmarked for expansion could run out fairly quickly, Odendaal says the company is unlikely to fund entire projects alone.

“We would partner with a local player,” he says. “Obviously we want a controlling stake but it could be a 60-40 split (in favour of PPC).”

Odendaal says PPC is already one of two finalists awaiting Government approval of a bid for a plant in the DRC, but the company’s annual report shows it’s also targeting Zambia, Malawi, Uganda, South Sudan, Ethiopia and non-coastal areas in Kenya, Tanzania and Mozambique for expansion. Steering clear of the coast will allow it to avoid the effects of Indian Ocean humidity, which plays havoc with cement, while also shielding it from cheaper Chinese, Indian and Pakistani imports.

Construction crumbling

One argument in favour of expanding in the rest of Africa is the grim outlook for SA’s construction sector. Another is the potential for growth. The combined population of the countries PPC is targeting is around 350m with per capita cement consumption of just 55kg/year, well short of SA’s 220kg/year.

Analysts, though, say the potential returns in Africa are not commensurate with the risk. PPC is also likely to face stiff competition from Nigeria’s Dangote Cement, already Africa’s biggest producer of the building material and a company with big ambitions to expand on the continent.

The fact remains that PPC has very little choice but to look north. Despite the company’s 30 January trading update proclaiming its cautious optimism following a 7% increase in cement sales for the fiscal first quarter to end-December 2011, SA’s construction prospects remain grim.

Government spending on infrastructure still accounts for more than 50% of the construction market and with the Treasury forecasting a budget deficit of 5.5% of GDP this fiscal year, a recovery is unlikely any time soon. Residential real estate is also still in the doldrums despite the lowest prime lending rate in 30 years.

Strong competition

Structural issues also dog PPC – five of its eight cement plants are situated inland, mostly clustered around Gauteng with one in the North-West and another in southern Zimbabwe. While the company enjoys 100% market share in the Western Cape, which it supplies via plants in Cape Town and Saldanha, the construction sector there is virtually dead.

“PPC has good assets but they’re in the wrong areas,” says one analyst. “Gauteng is where the action is, but it’s also where the competition is.”

Still, it might be a good idea to hold on to any PPC shares you’ve already acquired. The stock has recovered some of last year’s 18% slide and is currently trading at an almost one-year high of R28.33. On a trailing earnings multiple of 17.17 one could argue that PPC is expensive but with dividend yields at or about 6% for each of the last three fiscal years (5.6% in 2011, 6,3% in 2010 and 6,0% for 2009) holders of the stock should probably wait for a payout.