Merger with AfriSam 'likely to boost PPC'

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The cement company is considering a merger proposal put forward last month by smaller rival AfriSam, which has suggested a merger ratio of 55%-65% in favour of PPC and 35%-45% in favour of AfriSam.

PPC shares trade at a less demanding price:earnings ratio of about 12.22 after losing a third of their value in four months. They are at their lowest level in about a decade.

Despite PPC having resolved its board ructions at its annual general meeting on Monday, the share price has failed to claw back lost ground. This could, in part, be a result of a trading update the company issued forecasting a fall in earnings of up to 45% for the six months ending March. Imara analyst Sibonginkosi Nyanga said this week that PPC's recently changed dividend policy and the tough trading conditions for local cement producers warranted "a fully-valued recommendation".

Given PPC's constrained balance sheet and large funding needs as it invests in projects across Africa, it decided last year to increase its dividend cover ratio from a range of 1.2-1.5 times to 1.8-2.5 times. The cement producer's dividend policy was a drawcard for some investors.

"Our only potential catalyst for a re-rating is the proposed merger between PPC and AfriSam - which would create (a company with) an estimated 60% market share - as PPC's African plants are only expected to become fully operational in financial year 2016," Mr Nyanga said. "We maintain our hold recommendation with the speculation that the Competition Commission will approve the AfriSam deal."

PPC chairman Bheki Sibiya, whose position was affirmed by the new board on Tuesday, until he steps down following a transition period, said the company's executives were assessing the business case for the proposed merger. "Once they're done they are going to approach the board and make a recommendation one way or another."

"It has to make business sense and there have to be synergies."

Once the board made a decision, the next "hurdle" will be to get approval from the competition authorities, followed by negotiations between PPC and AfriSam about their relative valuations.

The Public Investment Corporation holds 12.57% of PPC and has a controlling 66% stake in AfriSam.

Source: Business Day