Financial year 2017 was a turbulent period for PPC as we faced numerous challenges, ranging from falling profitability in an increasingly competitive landscape and a difficult economic climate in South Africa to a slowing economy in Zimbabwe and liquidity challenges. While our new plant in Rwanda continued to ramp up, political uncertainty and lower growth expectations in the Democratic Republic of the Congo may affect the prospects of that project.
By the end of 2015, we projected that group debt, arising from our Africa expansion strategy, would peak at R12 billion in 2017. Our plans to raise capital had to be brought forward when, in May 2016, S&P Global Ratings downgraded our corporate credit rating to below investment grade on liquidity and leverage concerns. The severity and timing of the ratings action was unexpected and compelled us to increase the quantum of capital raised to R4 billion. The accelerated terms of the bond programme meant we had to make an offer to buy back the bonds within three days of the downgrade, in turn requiring the board to make a going concern assessment at that point. In short, while the extent of the downgrade was not anticipated, the fact that it triggered accelerated terms for the bond programme made it a matter of critical proportions that cost the company dearly.
In the period we concluded a successful rights offer and reduced the group net debt to EBITDA ratio to 2,3x from 3,7x, significantly strengthening our balance sheet and giving us the opportunity to review our capital structure. After the strategic black partners and community service groups’ components of our 2008 broad-based black economic empowerment (BBBEE) transaction reached the end of the transaction date, PPC received R1 billion on 15 December 2016. This was used to further reduce our debt and fund capital expenditure, particularly the SK9 project in North West province, South Africa.
Against this background, the board focused on restoring the company to a firm footing. This included improving risk and governance processes across the group, driving operational efficiencies and ensuring delivery of short-term priorities such as completing projects. I am pleased to say we have made much progress. The debt and liquidity positions continue to receive our considerable attention in the current economic climate.
In November 2016, the new Harare milling plant was completed and commissioned on time and below budget. PPC Harare was officially opened by His Excellency, President Robert Mugabe, in March 2017.
PPC Barnet DRC is now in production and loaded its first batch of saleable cement in April 2017. Hot commissioning of the 1mtpa greenfield cement factory started in February 2017 after completing the bulk power supply to the plant. Also in April, the Habesha Cement plant in Ethiopia was inaugurated in the presence of His Excellency, Prime Minister Ato Hailemariam Desalegn. Cement sales started in June 2017.
The SK9 project in North West province remains on track for commissioning in the first half of calendar 2018. With three of four major projects commissioned, our focus turns to ramping up the new cement plants, the optimisation of production and distribution efficiencies, and consolidating these into the group’s operations.
Our strategic approach aligns itself to the principles of sustainable value creation, integrating strategy, risk and opportunity, performance and sustainable development. The board and management have concentrated on getting the company back on track and positioned for its future, but the year ahead will be challenging given the subdued economic growth and financial pressures in several of our major markets exacerbated by political uncertainties.
The South African cement sector has completed a structural shift as investment shifted from large infrastructure and construction projects to individual home builders.
Two new players have fully integrated into the local market, taking the number of cement manufacturers to six. In our view, given the demand/capacity utilisation ratio, the South African market is poised for consolidation. We are being deliberate and proactive in this regard and, in February 2017, advised shareholders that PPC was formally assessing the merits of a potential merger with AfriSam. Creating a South African cement producer that is financially stronger, operationally more efficient and has deeper technical capability could benefit our stakeholders and the sector. The merged entity, by virtue of enhanced abilities, will be better placed to invest in growth opportunities domestically and develop as a major African cement producer, given its complementary production assets in six African countries outside South Africa. A merger between PPC and AfriSam, in particular, could result in a significantly empowered entity given the current BBBEE shareholders of both companies and PPC’s proposed BBBEE transaction (BEE III).
Although the process is advanced, much work remains to be done and by no means certain. A merger of this size and complexity would change the industry and there are many challenges for the board and shareholders to contemplate. Further updates will be communicated through the JSE’s Securities Exchange News Service (SENS) in due course.
The domestic market remains subdued. Manufacturing production decreased by 3,6% in February 2017 year on year (StatsSA, April 2017).
After the country’s foreign currency credit rating was downgraded by S&P Global Ratings and Fitch to sub-investment level, the outlook for domestic economic growth is uncertain. The Bureau for Economic Research (BER) reported that “these developments will undoubtedly further constrain the medium-term prospects for the SA economy” and subsequently revised its GDP growth forecast down to 0,3% for 2016, 0,6% for 2017 and 1,3% for 2018. On 6 June 2017, Statistics South Africa announced that the South African economy had moved into recession. This follows a 0,3% and 0,7% decrease in GDP in the fourth quarter of 2016 and first quarter of 2017 respectively.
According to African Development Bank’s African Economic Outlook 2016, Botswana’s growth prospects look promising, with real GDP growth projected to pick up slightly in 2017. Improved growth over the medium term is predicated on the government’s economic stimulus programme, gradual recovery in the global diamond market, and increased energy availability following remedial measures at Morupule B power station.
Botswana is recording a high rate of urbanisation, with nearly two-thirds of the country’s population now living in urban areas. This is positive for cement demand.
Democratic Republic of the Congo*
In 2015, economic growth dropped to 6,9% and is forecast at 2,8% and 4,1% for 2016 and 2017. This has significantly affected government spending. The exchange rate is deteriorating rapidly against the US dollar and CPI is forecast at 33,5% for 2017 (NKC African Economics, DRC, quarterly update, March 2017). Despite the drastic fall in the price of raw materials, macro-economic stability was preserved due to a tightening in tax revenue collection, international reserves and an increase in the current account deficit. To strengthen the economy’s stability and resilience to shocks, in January 2016 the government adopted 28 urgent measures, and as part of the strategic national plan for development currently being drawn up, it decided to diversify the country’s economy and broaden the value creation chain.
Successfully completing free, democratic elections, initially planned for 2016, is the country’s main political challenge to consolidate the achievements of a democratic process that began in 2006 (African Economic Outlook 2016 report).
Ethiopia has recorded double-digit economic growth, averaging 10,8% since 2005, mainly underpinned by public sector-led development, according to the African Economic Outlook 2016 report. Real GDP is estimated to have grown by 10,4% in fiscal 2015, 8% in 2016 and analysts expect GDP to grow to 6,9% in 2017 (Ethiopia Economic Outlook, Focus Economics). The agriculture, services and industry sectors accounted for 39%, 47% and 15% of real GDP, respectively. Public investments are expected to continue driving growth in the short and medium term: huge investments in infrastructure and development of industrial parks, prioritised to ease bottlenecks to structural transformation, still have to take shape with industry playing a significant role in the economy (AEO report, 2016).
Ethiopia, the second-most populated country in Africa after Nigeria, is also the least urbanised, at only 19,5%, significantly below the sub-Saharan average of 37%. The urban population has grown at an average 3,8% per annum since 2005 and is expected to triple from 15,2 million in 2012 to 42,3 million by 2037. This could pose a significant development challenge if not addressed. Since 2005, the government has focused more on developing housing, upgrading slums, providing infrastructure and promoting small urban enterprises which should be favourable for our industry.
The African Economic Outlook 2016 reported average real GDP growth of 6,9% in the first three quarters of 2015 (lower than the 7,2% average for the same period in 2014), in line with the 7,0% target for that year, and led by the services and industry sectors. Moderate growth in the agriculture sector partly reflected fluctuating weather conditions. For 2016 and 2017, sustained investments to address energy and transport infrastructure constraints, continued progression in industry and a recovery in services were expected to support growth. The IMF World Economic Outlook report (April 2017) forecasts a growth rate of 5,9% and 7,2% in 2016 and 2017 respectively.
Cement consumption in Rwanda has been growing faster than production, on average, in the East African Community (EAC) (AIB Capital cement sector report, 2016). EAC member states have prioritised development expenditure, with Rwanda expected to spend US$2,5 billion on infrastructure in fiscal 2016/2017.
The country remains in debt distress, exacerbated by the lack of a diversified export base and declining terms of trade that make it difficult for it to adjust to changing world demand for tradeable goods. These structural weaknesses have constrained its ability to generate the high and sustainable growth required to mitigate debt distress. In addition, the external position is projected to remain under severe pressure in the medium term given poor export and import performance against an appreciating US dollar. The Public Debt Management Act, promulgated in September 2015, is expected to strengthen the legal and institutional framework for debt management.
The fiscal space remains constrained due to underperforming domestic revenues, rising public expenditure, depressed exports, limited foreign direct investment (FDI) and other capital inflows into the country. This has undermined development expenditure and social services provisions in both urban and rural areas, exacerbating the incidence of poverty.
The depreciation of the South African rand against the US dollar has pushed prices of imports from South Africa down. This trend, along with weak domestic demand, tight liquidity conditions and declines in crude oil and global food prices, resulted in negative inflation. Annual average inflation declined from -0,2% in 2014 to -2% in 2015. Inflation is projected to remain negative in 2016 and 2017 (African Economic Outlook report 2016).
Strategic priorities for 2018
On the back of a very difficult year, we have adopted a refreshed approach to continually reviewing, assessing and refining our strategic priorities. While our long-term strategy remains intact, our strategic priorities for the next 12 months include debt refinancing, consolidating our projects in Zimbabwe, DRC and Ethiopia, exploring opportunities to derisk our investment in DRC, finalising a new black empowerment deal (BEE III) and concluding our deliberations on the proposed merger with AfriSam.
The investment in the DRC is likely to be more challenging than originally anticipated, given the market dynamics in that country and the funding structure.
These strategic factors naturally impact any decisions the board will make in relation to dividends, and will need resolution before we are able to make any commitments with regard to dividends in the near future.
Changes to the board
After Bheki Sibiya’s retirement, I was appointed chairman on 24 October 2016.
I am assisted by a capable team of 12 directors, the majority of which are non-executive directors, with an independent majority as per JSE Listings Requirements.
Bridgette Modise, who was required to retire by rotation at the shareholders meeting on 31 October 2016, decided not to stand for re-election. Bridgette was appointed to the board in 2010 and her contribution often extended beyond the ordinary course of business. The board extends its thanks to Bridgette and wishes her well in her future endeavours.
Nonkululeko Gobodo was appointed a non-executive director from 8 February 2017. Her appointment will be tabled at the upcoming annual general meeting (AGM) for confirmation by shareholders.
In addition, membership of some board committees has changed. Nicky Goldin joined the audit committee to serve with Todd Moyo and Tim Ross. Nonkululeko Gobodo also joined the audit committee on 8 February 2017.
Timothy Leaf-Wright was appointed chairman of the risk and compliance committee on 31 October 2016.
Over the past year, the board and management of PPC have faced many challenges, often navigating uncharted territory. On behalf of the board, I thank Darryll Castle, his management team and the rest of Team PPC for their hard work and resilience in this challenging period. It was an unusually difficult year in which many advances and achievements were masked by the liquidity, debt and market constraints and significantly reduced profitability. Team PPC were up to the challenge.
Thank you to my fellow board members for your continued diligence, counsel and support.
As we celebrate PPC’s 125th birthday, I’d like to extend a special word of appreciation to our customers, employees, stakeholders and partners for your ongoing support and the invaluable role you continue to play in our success.
12 July 2017