Turning cement into cash

Posted On Thursday, 17 November 2005 02:00 Published by eProp Commercial Property News
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It should be almost inevitable, considering the broad trends in the economy and government's aspirations to lift growth further, but the trend is becoming more apparent

Construction IndustryIt should be almost inevitable, considering the broad trends in the economy and government's aspirations to lift growth further, but the trend is becoming more apparent. Fixed investment stocks are attracting increasing attention from investors.

Most of the larger stocks in this sector have reached new highs in the past week, including PPC, Reunert, Altech, Altron, Murray & Roberts and WBHO. The bullish sentiment has been backed by strong results from some of these, particularly PPC and Reunert.

From a long-term perspective, PPC seems to have made an art out of generating consistently good returns from the unglamorous business of making cement and lime. Despite the consumer spending boom and recent run in resources stocks, the share has outperformed the JSE all share index over the past four years.

It has an unusually good dividend record, and certainly didn't disappoint with its payouts for the year to September. Along with the 19% growth in headline EPS (and 22% rise in annual dividend), there is a special dividend of R8/share.

That makes this the fifth successive year that the company has declared a special dividend. It's also interesting that it's been declared soon after PPC's board approved a R1,36bn expansion project, which suggests considerable confidence in future cash flows.

Whatever the prospects may be, PPC has been an excellent cash generator for parent Barloworld. That's been particularly helpful recently, when results from some of the diversified group's offshore activities have been disappointing, in part because of the strong rand.

The share valuations are reflecting Barloworld's increased dependence on its listed cement and lime producer. With PPC's share having outperformed Barloworld's over the past four years, the former's R16,76bn market capitalisation now equates to 67% of Barloworld's R25bn market value, the highest it's been in more than a decade. The group's 71,6% stake in PPC is worth R12bn, or 48% of Barloworld's market cap.

In the March interims, PPC provided 42% of Barloworld's operating profit before goodwill amortisation. Profits from most of the unlisted activities - earthmoving equipment, industrial distribution, coatings and scientific - were down. Steel tube and motors were up, though the latter was reflecting increased investments in Avis.

Weakness in the rand may help Barloworld to earn a better rating. But its share has underperformed the JSE industrial sector this year, even with help from PPC.

Murray & Roberts' share recently broke above R20 after trading in a range below R16 for several years, but this counter's upward trend seems more tentative than some of the other fixed investment counters.

That may just be a matter of timing. However, continuing uncertainty about projects such as the Gautrain, and the potential risk, can't be helping. There are also differences in focus. Murray & Roberts continues to pursue an international strategy, as shown by its acquisition last week of an additional interest in Australian engineering and contracting group Clough, taking its stake to 47%.

International exposure should help to diversify risk but that hasn't always happened. Still, after its recent "rebuilding" Murray & Roberts should be one of the stronger players in the domestic fixed investment sector.


Last modified on Friday, 18 October 2013 10:45

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