A geared play to growth in construction spend
#themes: improvement in efficiencies, disciplined capital allocation, improving macros, compelling dividend play
PPC has been manufacturing, distributing and supplying cement to the South African market for over 130 years. In addition to its cement operations in Zimbabwe and Botswana, the company also sells aggregates, readymix concrete and fly ash products into these markets. The company’s value-destroying businesses in Ethiopia and the DRC have now been disposed of and a strategic exit from Rwanda completed.
PPC has spent in excess of R4.4bn over the past 10 years in modernising and upgrading its South African cement facilities. In addition to its well diversified portfolio of cementitious products, another key differentiator of PPC is its strong regional presence across South Africa. The company’s operations in Zimbabwe further reduce the risk of exposure to the current low growth region of South Africa.
Despite our forecast for GDP growth in South Africa rising to only 2.1% in 2026, cement volumes are expected to grow off a depressed base as interest rates start falling towards the end of 2024 and the likelihood of load-shedding diminishes. With the introduction of several self-help measures, we forecast improved returns, improved free cash flow generation and the continuation of cash dividends over our forecast period. Importantly, PPC is the most geared of the SA cement players to benefit from any meaningful uptick in cement demand as mothballed kilns can be brought back into production at minimal cost.
The allocation of capital has started to improve following the appointment of a new executive management team where strict capital allocation principles and an emphasis on returns is now the mantra of the company. Following the disposal of loss-making and non-core operations, the balance sheet is in a much stronger position with net cash of R78m, before the payment of dividends. The company’s ESG credentials are strong and it has a clear path of reducing CO2 emissions. Furthermore, this journey to reduce emissions is expected to result in lower operating costs. A new CEO has now been appointed and the collective experience of the executive committee in the international cement industry exceeds 60 years. Two additional appointments have added a further 60 years of technical experience to the team.
The recently announced strategic relationship with Sinoma will be an important pillar of PPC’s strategy to become a more efficient and sustainable producer of cement through the accelerated transition to alternative non-fossil fuels (coprocessing) and adoption of more modern technologies.
Valuation: We initiate coverage of PPC with a fair value range of R4.00 to R4.86, providing an estimated total return of between 3% and 25%, including a 13.8% dividend yield (ordinary dividend yield of 5.4% and a special dividend yield of 8.4%). The three valuation methodologies used are residual income, discounted cash flow and intrinsic value. We forecast FY25E and FY26E dHEPS of 20.7c (growth of 7% based on continuing operations) and 30.9c (+49%) respectively, with DPS over the same period of 54.0c (+294%) and 30.9c (-43%) respectively.
Risks: Macroeconomic challenges regarding interest rates and consumer sentiment, management interactions regarding cost control, overcapacity in the cement industry, pricing risks, cost pressure and environmental concerns and the successful implementation of the group’s new strategy.
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