The increase in revenue at cement producer PPC’s cement businesses in South Africa and Botswana was driven by price increases in the ten months ended January 31, positively offsetting a decline in sales volumes in the six months to September 30, 2023.
In an operating update issued on March 27, PPC said total group revenue rose 27.6% for the ten months, although this was mainly due to continued strong growth in its Zimbabwe operations against a low base of comparable period in 2022.
The Zimbabwe operations achieved year-on-year revenue growth of 22.1% for the ten months under review.
PPC reported that its earnings before interest, tax, depreciation and amortization (Ebitda) improved from 9.9% to 13.6% year-on-year.
However, this was lower than the half-year Ebitda margin of 15.3%. The company attributed this decline to lower cement margins in South Africa, weak performance in the materials business, one-off costs at the group level, as well as slightly lower Ebitda margins in the Zimbabwe operations.
Capital expenditure (capex) for the group remains behind guidance of R600 million for the full financial year, mainly due to the delay of PPC’s fly ash project in Zimbabwe.
The company blamed this on a timing issue due to a delay in accessing the power plant to complete the plant design and commercial contract. This is now expected to begin in early FY 2025 as opposed to FY 2024, thus delaying the benefits of this expansion project by about a year.
South Africa and Botswana free cash flow, which is net cash inflows before financing activities and excluding dividends from Zimbabwe, increased to R364 million in the current period from R242 million in the corresponding period. The share buyback program reached the authorized level of R200 million during the first half of March.
Following the receipt of proceeds from the disposal of Rwandan cement business Cimerwa, PPC’s operations in South Africa and Botswana became cash positive, resulting in a net cash position of R280 million as at 31 January.
PPC sold its 51% stake in Cimerwa on January 25 for a total sale price of $42.5 million. PPC received the full sale price and paid Rwandan capital gains tax of $474,000 in February. It is expected that no further capital gains taxes will be payable in South Africa.
Approval from the Competition Commission for Eastern and Southern Africa, which was not required prior to the implementation of the transaction, is expected to be received within 120 days of the effective date.
The Zimbabwean business continues to remain debt-free, holding R95 million in unencumbered cash at the end of January. The group’s targeted gross leverage of 1.3 to 1.5 times the Ebitda of the South African and Botswana operations (including dividends from Zimbabwe) remains unchanged.
During the period under review, PPC reports that cement sales volumes in South Africa and Botswana were down 4% year-on-year. The year-on-year decline for the first half of the year to September 30 was 5%.
Sales volumes in the coastal region declined more than inland, mainly due to the weaker retail market and lack of infrastructure projects in the region.
Price increases implemented in July last year and in January offset lower volumes with cement businesses in South Africa and Botswana, boosting revenue by 6% in the current period compared with a 5% increase in the half.
Ebitda margins rose slightly from 10.7% to 11.4% compared to last year’s ten-month period, but are below the 12.6% reported in the six-month period. However, PPC noted that South African and Botswana cement market performance has deteriorated since late January.
PPC’s materials business includes three distinct businesses, focusing on ready-mix concrete, aggregates and fly ash, respectively. The ready-mix concrete business was affected by a lack of construction projects in the regions in which it operates, which negatively impacted volumes.
The aggregates business delivered lower volumes in the depressed local market served by its two quarries. However, the fly ash business continued to benefit from volume growth due to its diverse customer base.
The materials sector saw a marked improvement in negative Ebitda, moving from negative R60 million a year ago to R7 million in the current period. PPC said this change was significant considering the positive Ebitda contribution of RON 14 million at the half-year mark.
Despite the price increases, the negative Ebitda was attributed to the significant decline in volumes in the ready-mixed concrete and aggregates businesses, which fell further compared to the first half. However, fly ash business Ebitda continued to show strong growth in the current period.
Meanwhile, cement volumes showed strong growth, rising 41% in the ten months to January 31, although slightly lower than the half-year growth of 44%, due to the effect of a stronger base in the corresponding period earlier.
Growth continues to be equally strong as a result of both government-sponsored homebuilding and infrastructure projects, limited imports and a low base from a year ago due to the prolonged shutdown.
Ebitda margins were 22% in the current period, reflecting an 18% year-on-year improvement but lower than the 25% improvement recorded in the half. This was mainly due to the high cost of clinker imports, as local production could not meet demand levels.
PPC Zimbabwe announced dividends of $4 million in July last year and then $7 million the following November. The next dividend declaration is expected in July.
PPC reports that the short-term outlook for the South African and Botswana markets remains subdued, although the short-term outlook for PPC Zimbabwe remains positive.
The company says the reorganized and strengthened executive committee (exco) team announced on January 18 now has the right mix of global and local cement industry experience, institutional and technical expertise and a renewed energy to drive the necessary improvements at the operational level the company’s.
The exco is conducting a comprehensive review to ensure PPC is flexible, well managed and resilient in what PPC said is a challenging South African macroeconomic environment.
Key areas of focus include optimizing structure, processes and controls. refocusing the business on the contribution margin through evaluating the commercial footprint of South African businesses; and reducing fixed operating and overhead costs.
These will require improvements in internal management reporting systems to better support PPC’s commercial and operational decision-making.
With this in mind, the board has aimed to achieve a sustainable return on capital for its operations in South Africa and Botswana in the medium term.
PPC adds that it intends to increase engagement with regulators and other key market players to further develop a more sustainable cement industry in South Africa by creating a level playing field between local, regional and international competitors on key issues such as imported cement and the low quality standardized products.
As South Africa’s gross debt to Ebitda ratio is expected to be well below the stated optimal level, PPC notes that it intends to continue returning cash to shareholders through dividends or the implementation of a share buyback program in the absence of any corporate value enhancement activity.