PPC’s comeback starts to cement itself

Two years into PPC’s turnaround, CEO Matias Cardarelli insists the job is only half done. Investors, however, aren’t so sure.

After transforming one of the JSE’s longest-running corporate disappointments into a cash-generating business again, analysts argue that most of the easy gains from cutting costs and improving operations have already been banked. The next challenge, they say, is that there is very little growth in a South African market that has barely expanded in years – and that the company now has to look elsewhere.

Cardarelli – who took the role in December 2023 specifically as a turnaround specialist – disagrees. “There is still a lot of value to be unlocked internally,” he says. “I would say only 50% of the turnaround has already happened. There is still a lot of room ahead.”

The results released on Monday suggest he has earned the benefit of the doubt. Earnings before interest, tax, depreciation and amortisation (ebitda) rose 31% to R2bn, margins topped 20%, free cash generation strengthened again and the dividend increased 72%. That’s even though revenue rose a paltry 3.9% to R10.2bn, with the 134-year-old company getting no help from its home market, where economic growth has flatlined below 1% for the past decade.

When Cardarelli arrived, PPC was drowning. In FY 2017, the company had R4.7bn of net debt against a shrinking ebitda of just R1.4bn. It had stopped paying dividends in 2016. Just a few years ago, analysts thought the company might go under. 

“At the time you were struck by how poorly they [PPC] understood their markets,” says Charles Boles, founder of Titanium Capital. In failing to focus on new entrants such as Sephaku and Mamba, it lost its competitive edge.

The turnaround strategy meant an entire overhaul of the business’s foundations. Administration and operating expenditure was reduced by 19% to R763m, with trading profit improving by 50% to R1.5bn. A major cost-saving effort was the insourcing of logistics, which had been outsourced despite being the largest expense for any cement company. This is one of the areas where Cardarelli reckons value is still trapped.

Additionally, PPC has now “stopped looking for market share or volume and focused more on value-accretive sales”, Cardarelli continues. “We looked into which product we were selling, to whom we were selling, at what price we were selling, and in what region we were selling.”

Part of this process involved rebuilding management teams to “change the organisational culture of the company”, Cardarelli says.

The growth question

“One of the takeaways for me is that revenue remains relatively flat. There’s no top-line growth; it’s really a case of optimising internally and cutting where they can,” says Stephen Erasmus, an investment analyst at Anchor Capital. “I would think that the low-hanging fruit has been picked.”

For both Boles and Erasmus, external growth is the next step for PPC. But the South African cement market is hardly the new hotspot of development. Boles points out that demand has virtually flatlined in South Africa in recent years. “That is highly unusual for an emerging market,” he says. “Normally, emerging markets are growing, they’re investing, and cement is normally a beneficiary and a good place to be.”

For PPC to grow, “you need South Africa to turn into a building site”, Erasmus says. “And I don’t see where that’s coming from at the moment.”

Cement demand in South Africa has remained at 13-million to 14-million tons per year for several years, while domestic producers have the capacity to produce 20-million to 23-million tons per year. “You’ve got more capacity than you’ve got demand,” Boles notes, meaning cement producers are fiercely fighting over business opportunities.

Erasmus points to the construction of PPC’s new RK3 plant as a potential driver of external growth, though the project is set to cost R3.1bn and will likely not generate profits for some time. PPC’s Zimbabwe solar project – speculated to cost $40m – remains largely peripheral to the core cement business, though it will cut power costs over time, cut emissions and reduce the company’s reliance on that country’s grid.

Why investors are backing him anyway

On the back of this turnaround, Ninety One, Africa’s largest money manager, has upped its stake to 5%, having held less than 3% a year earlier, while the Government Employees’ Pension Fund increased its holdings in PPC to nearly 11.5%, from about 10% a year ago.

The company has a spread of good assets in well-located areas and an impressive management team that is “not just relying on the cycle turning to perform”, says Boles.

He believes investors are betting that the building cycle will turn and that returns will shift from decent to excellent. “If [there is] a pick-up in building, you could earn really good returns.”

Erasmus holds a different view. “Investors are struggling for ideas in the South African equity space,” he tells Currency. Consumers are under pressure, and retailers aren’t performing. “Things are quite complicated right now from a geopolitical perspective, and if you overlay that onto a South African economy dealing with its own challenges, that’s quite a spicy combination.”

The shrinking JSE also plays a part. Investors “aren’t spoiled for choice”, and when “a half decent idea pops its head up”, people are all too happy to chase after it.

The valuation equation

Cardarelli is happy to play into that idea, claiming that the company’s shares are significantly undervalued. “Conservatively, companies are sold applying a multiple of seven to the ebitda of the company,” he says of other cement companies. “These are companies with worse assets than PPC, [a] worse footprint than PPC, worse branding than PPC.” Given PPC’s ebitda of R2bn, he thinks its share price should be somewhere closer to R10, rather than the current R7.

Boles is unsure. “I’m not saying he is wrong, but as investors, it’s a comment that you’re a little weary of hearing.” In his view, PPC is “not unduly expensive”, and mostly fairly priced.

Erasmus notes that comparing PPC to international peers is “like trying to compare apples and pears just because they are both fruit. That whole argument falls flat because you’ve got so many different factors and they’re just not comparable.” The South African economic context plays a role. “People are not going to put the same multiple on a South African business as an international business.”

Says Cardarelli: “PPC has done so poorly for, I don’t know, 15 years before we came.” He understands it could be difficult for the market to suddenly have faith in this new success story, though he is clearly eager to prove that the giant has really awakened.

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_{Top image collage: Rawpixel; Currency.}