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PPC sets sights on low-cost housing

Johannesburg - Cement producer PPC [JSE:PPC]'s latest set of interim results has drawn a mixed response from analysts, although many agree stocks may offer long-term value to shareholders.

Reporting results for the six months to-end March on Tuesday, PPC posted an increase in revenue of 5% to R3.4bn, while headline earnings were up 10% to R1.4bn.

PPC CEO Paul Stuiver was cautious in his own outlook for the group. "PPC has produced a good set of results by increasing revenue, profitability and operating cash flow in a difficult economic environment," said Stuiver.

While the contributions from our Zimbabwean cement operations and the lime and aggregates divisions improved significantly, South African cement demand continued to decline and we remain concerned over the outlook for cement demand in the second half". 

A potentially promising market for PPC is the low-cost housing sector.

"The development of low-cost housing over the period 2009 to 2015 is expected to be the single largest demand driver for cement in South Africa," said Frost & Sullivan industrial analyst Litiya Matakala. "With the government planning to deliver an estimated 630 000 housing units per annum between 2010 and 2015, cement suppliers are assured of a high and steady demand."

Matakala has, however, identified some "major challenges" for PPC in coming months, most notably rising energy costs associated with Eskom's tariff hikes.

"The increasing cost of energy is a major challenge for cement manufacturers in South Africa," said Matakala. "Energy costs account for a substantial proportion of the total cost of producing cement. As a result, the operating margins of cement producers are increasingly under pressure, as diesel, coal and electricity costs rise."

Stockbrokerage Barnard Jacobs Mellet advised clients PPC's numbers were lower than expected in terms of earnings and volumes, while the firm remained under pressure. "We would be avoiding PPC at this point," the firm said.

Sasha Naryshkine from asset management firm Vestact remained upbeat on PPC's prospects, pointing out the company had a 100-year track record as a listed business. He said PPC is also likely to benefit from building up its capacity ahead of its competitors.

"I suspect that in the short term [management] will have to appease shareholders by holding the dividend, while still paying down the debt from the expansion," he said. "It will be a fine balancing act.

"Margins are traditionally good. I think what shareholders have to realise is that this was the first recession in 17 years, and globally built on the back of some serious expansion in both commercial and residential real estate. Luckily we have a big government infrastructural plan to look forward too."

Warwick Lucas, an analyst at stockbrokerage Imara SP Reid, is also upbeat about prospects for the firm. In late April he upped his recommendation on the stock from "hold" to "long-term add". "Not withstanding the poor fashionability of building stocks, PPC is priced at a level where it offers value," he said.

Shares in PPC were off 0.2% (7c) to 3 310c in early trade on Tuesday.

 - Fin24.com

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