S&P downgrades PPC on debt and profit concerns
Cement maker says it is not concerned about liquidity
S&P Global Ratings has cut PPC’s rating to one notch above non-investment grade as falling cement demand and stiff competition dampen the prospects of the company’s SA business.
“The downgrade follows weaker-than-expected profitability in PPC’s South African business coupled with ongoing macroeconomic and currency regime uncertainty in Zimbabwe,” S&P said on Tuesday.
“As a result, we expect an increase in the group’s debt to ebitda (earnings before interest, tax, depreciation and amortisation), tighter covenant headroom, and potentially also a greater reliance on shorter-term working-capital facilities to meet upcoming debt maturity obligations, if the group is unable to extend its debt maturity schedule,” it said.
S&P said that due to declining demand for cement and increased competition in SA, PPC’s debt-reduction prospects in the local market have been dampened.
In the nine months ended December, PPC’s Southern African business increased cement prices as much as 2%, while cement volumes were down 3%. Between January 2018 and November 2018, total cement imports increased 80%, PPC said.
S&P said there could be as much as 35% overcapacity in the local cement market “considering additional tons from imports and local blenders, which has eroded producers’ pricing power”.
PPC said on Tuesday the downgrade is symptomatic of tough conditions in the local cement market and the impact of the poor state of the Zimbabwe economy.
“The above triggered the assessment of S&P on PPC credit given that Zimbabwe contributed 30% to PPC Group ebitda in the 2018 financial year and 63% of the cash balance for 2018,” PPC said.
S&P said from a trading and financial reporting perspective, macroeconomic and currency regime uncertainty in Zimbabwe will have severe negative implications for PPC’s Zimbabwe business in the short term.
PPC said it is comfortable with its liquidity and can handle the volatility in the market. The company, which has R5.2bn in debt, said it often managed and reviewed its debt maturity profile.
In response to the challenging macroeconomic climate in SA, the company is implementing price increases locally.
“We are seeing the impact of the slowdown in the economy, especially in the construction and building industries, leading to lower volumes and profits. This leads to problems in terms of repaying debt in the short term because there is not enough free cash flow,” Ron Klipin of Cratos Wealth said on Tuesday.
Klipin said the cement maker’s debt is overtaking its ebitda. “That is why there is risk of breaking the debt covenants,” he said.
Klipin said PPC has also taken strain from the influx of cheaper imports, especially in the country’s coastal areas.
“In addition, the new Zimbabwe currency has depreciated significantly against the rand and this impacts on the transfer profits to SA,” he said.