The Finance Ghost — Market lowdown on PPC, Sephaku, FirstRand, Nedbank and Absa

30 Jun 2024

The performance of the cement and banking industries is a reflection of the cautious, ‘wait and see’ approach of most investors after the elections

Cement is a hard industry

The cement game is definitely not on anyone’s list of low-stress ways to make a living, especially in South Africa. On one hand, you have sluggish infrastructure investment that creates a low level of demand relative to the cement manufacturing capacity in the country. On the other, you have the continuing impact of imports, particularly in the coastal regions where they are cheaper relative to local options.

Navigating this environment is tough, to say the least, and local groups like PPC and Sephaku are trying to do exactly that. Both have been looking for growth in Africa.

And why not? Cement manufacturers need markets that are spending heavily on infrastructure, which means that high-growth markets offer plenty of opportunities. They also bring risks, of course, not least in terms of currency exposures.

PPC has been on a turnaround of note for the past few years and is now under new management. CEO Matias Cardarelli is carrying on where his predecessor left off in terms of trying to run a tight operation. If anything, the talk has got even tougher.

It’s rare to see a listed company’s executive describe the risks and challenges with such candour. Clearly, extensive changes are under way at PPC’s local business as Cardarelli needs to respond to the relative lack of growth in the South African market.

Despite PPC managing to achieve positive revenue growth locally, there are reasons to be concerned about volumes and revenue in some areas of the business. PPC’s group numbers have been boosted by the performance in Zimbabwe, but it won’t rest on its laurels.

Over at Sephaku, the year-on-year numbers look great for the year ended March. Heps is much higher and Ebitda margins have improved at both the major underlying businesses. Sephaku is singing a different tune about volumes, particularly at Métier, which is enjoying a boost from the exposure to the Western Cape, among other factors.

But after a strong year, the first quarter of the new financial year has only shown modest revenue growth as South African investment took a breath before the election.

If the Government of National Unity (GNU) is seen as a business-friendly outcome, it will be positive for both these companies. If not, then the resultant uncertainty in the local market and the lack of major investment in physical assets will be a drag on earnings, putting them under pressure and forcing them to look for growth in other countries in Africa.

Banks would also like a GNU dawn

We saw a few banking updates this week. The FirstRand update reflecting growth in Heps of between 1% and 5% certainly wasn’t exciting, and much of this slowdown was driven by specifics in the UK business. This is relevant for FirstRand shareholders, but it doesn’t tell us much about the South African economy.

Instead, we can look at the red and green banks for a better indication of how things are going in South Africa. The corporate colours give an idea of the direction of travel, as Nedbank is still showing positive growth and Absa is unfortunately reporting negative moves for the first half of the year.

Although the underlying reasons for this vary (Absa’s negative move is related to specific nuances in the group, including an unusual strong first half in the base period), the consistency across the banks lies in the credit trends in the first few months of 2024.

Simply, the pre-election months saw a period of subdued demand for credit from South African corporates – a situation similar to the cement industry challenges. In uncertain times, the “smart money” plays a game of wait-and-see.

In the retail banking businesses, credit demand isn’t nearly as sophisticated. Instead of running forecast models, retail borrowers are living their lives and figuring out if they can get credit along the way. The banks have to adjust for the economic circumstances by tweaking their credit models and pulling back on certain products as required, such as unsecured loans.

It may make sense for the credit quality assessments, but that pull-back in unsecured lending has a knock-on effect in the insurance businesses of these banks. A core element of the unit economics of personal loans is the related credit life insurance. If you aren’t writing the loans, you aren’t selling the insurance.

The banks need an uptick in demand from corporates for debt. These are high-quality balance sheets that can deliver strong risk-adjusted earnings for our banks.

Just be careful of rate cuts that will hopefully start happening soon, as this puts interest margins under pressure at banks and stunts growth in earnings. The banks aren’t necessarily the best way to play a positive shift in local sentiment. DM

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This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

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Business Maverick

Cement is a hard industry

Banks would also like a GNU dawn