Mark Ingham's Fun-damental analysis
- Share price: 560 cents
- A Trading Buy and Portfolio Buy, at these levels
- DCF fair value at 750 cents
PPC is releasing interim results for the twelve months ended 31 March 2017 on Wednesday, 7 June. Is the 90% fall in headline earnings per share or the 30% fall in normalised earnings per share, as guided by the trading statement on 1 June, a reason to dump the stock or avoid? Probably not. Here’s why.
Investors should be aware that shares in issue have increased markedly because of the R4 billion rights offer in September 2016 in which 1 billion new shares were issued at R4 per share. This took shares in issue, net of treasury stock and BEE shares, to 1 538 million with effect from 30 September 2016 compared with 529 million as at 31 March 2016.
However, there will continue to be earnings per share dilution in to the 2018 financial year as the rights offer shares are in effect for six months of the 2017 financial year. Consequently, weighted average shares in issue for the year ended 31 March 2017 will be 1 137 million shares, 115% more than applied on 31 March 2016 but 26% less than current actual shares in issue. By September 2017, shares in issue will be 190% higher than in 2015. Weighted shares for the 2018 fiscal year will be 35% higher than the weighted shares for fiscal 2017. This makes quite an impact on reported EPS.
Normalised earnings is probably the best number to work with as it excludes some non-cash, non-operational and non-recurring items. On this basis, earnings in rand are set to be about R520 million compared with a pro forma R449 million for the twelve months to 31 March 2016. In rand, earnings will be up, by roughly 16%, even though EPS will be down 30% to about 46 cents.
The operating result will be relatively subdued although I expect cash flow to be positive. EBITDA will be in the region of R2 billion.
The lower debt position, which was R4,4 billion on a net basis as at 15 December 2016 compared with R9 billion before the rights issue and BEE equity inflow, is benefitting interest paid. Debt terming, the maturity profile, is also lengthening. R1,6 billion of debt matures in September 2017.
I don’t expect a dividend just yet so investors need to take a capital growth view on PPC for the time being, even though historically it was famed for its (too) generous dividends.
In F2018, I see net earnings of approximately R600 million as feasible, which with full dilution translates to 39 cents per share, lower than in F2017. However, thereafter earnings could conceivably grow to R1 billion or more, which is 65 cents per share. At that point, debt to equity will be down to a comfortable 25% and EBITDA interest cover a healthy 7,5x.
At 566 cents, the share price is not particularly expensive if one takes a medium-term view on its growing Africa portfolio. Yes, there are price pressures and economic challenges but cement has reasonably defensive characteristics. A deal with Afrisam is also now possible. My DCF fair value is 750 cents.
Mark N Ingham
GT Trading Desk Technical Take
Following onto Mark's fundamental analysis of PPC...
For those of you with your ear to the ground you will know that the GT257.com Trading Desk have been watching PPC for a while.
On the 17 of March, we pointed out that a bearish ‘head & shoulders’ pattern had emerged on the PPC chart. This textbook pattern is widely popular for its consistency in delivering profits to equity traders.
- Aggressive traders were alerted to the opportunity to short the CFD from R6.90 down to our target of R5.70 giving a profit of 120 points.
- Conservative traders would have waited for a confirmed trigger to begin shorting only once the share price had dropped below R6.50 giving a profit of 80 points.
After the call, the share price traded sideways for several weeks before finally cracking on the 25th of April, and hitting our first price target on the 8th of May. The technical trade played out well, with the share price recovering to the R6.20 region within a week.
PPC is currently trading at R5.60 per share, and there is a support range between R5.40 and R5.53. Traders looking to buy, should wait for the price to near the psychological level of R5.50 (beware the bounce) if support does not hold at that level, try pick up closer to R5.40 with a stop loss under R5.00