BROKERS’ NOTES: Buy PPC, sell Truworths

Sven Forssman, head of equity sales at Kela Securities

BUY: PPC

PPC looks cheap on any measure at 226c, but a value unlock may take longer than expected.

First, the cement company is close to finalising its paperwork for government protection against imports, but the problem is that once complete, the government has 18 months to act and PPC has to weather challenges from importers. Further, it must at times resubmit its application for protection, as the International Trade Administration Commission requires latest volume sales figures for the process.

Second, PPC is struggling with production costs from inflation and rising interest rates, which will linger for the next year. The company has reduced overall group debt to less than R10bn, but it still has a long way to go.

Infrastructure spend is happening, though business confidence is still weak and there is a lack of confidence in SA Inc. But capacity has been taken out of the system in South Africa because Lafarge and AfriSam have withdrawn from some areas.

SELL: Truworths

Our dislike of credit-dependent retailers drives our view to be long PPC and short Truworths.

We believe credit-dependent industries should be avoided for the next year or two, based on results from consumer-orientated companies.

Not only is a high percentage of Truworths’ South African sales on credit (60%-70%), but its clothing is also 20%-30% pricier than that of Foschini and more expensive than Mr Price’s merchandise. So, with interest rates up 325 basis points this year and consumers more indebted, it is trading down. We expect the Truworths top-line to start slowing, which is negative for the company.

Also, the retail sector hasn’t grown much in the past seven years, so we can’t expect any significant uptick in revenue.

Correction: Sven Forssman wrote: “PPC has reduced overall group debt to under R10bn but it still has a long way to go.” To clarify: PPC has reduced overall gross group debt to R1.433bn and net group debt to R677m.