S&P downgrades PPC on increasing debt

Standard & Poor's Ratings Services (S&P) has lowered its long-term South Africa national scale rating on heavy building materials producer PPC Ltd to 'zaA' from 'zaA+'. At the same time, it affirmed the 'zaA-2' short-term South Africa national scale rating on PPC.

S&P said it expects PPC’s net financial debt to increase materially over the near-term due to its increased capital expenditure on expansiory projects in the Sub Saharan region. The company’s strategy is to grow its Sub-saharan activity to account for more than 40 per cent of total revenue.

Due to the strategy and its costs, S&P has revised PPC’s financial risk profile to “significant” from “intermediate”. It forecasted that PPC’s ratio of S&P-adjusted funds from operation (FFO) to debt could decline toward 20 per cent from 29 per cent for the financial year ending 30 September 2014, despite improved operating performance.

It assumed that revenue will grow by seven to eight per cent in 2015 then 13 to 14 per cent in 2016, supported by the expansion plans, but that increased competition and South Africa’s sluggish economy could put pressure on volumes.

S&P qualifies PPC’s business risk profile as “fair” due to its satisfactory profitability and market-leading positions, particularly considering the consolidated nature of the cement markets in South Africa, Botswana, and Zimbabwe; and the significant barriers to entry in its industry. However “these positives are tempered by its exposure to the highly cyclical construction end markets; its relative lack of diversity compared with larger multinational peers; and the highly capital and energy-intensive nature of the cement industry,” it said.

“We also consider that sizable expansion plans into potentially more volatile emerging Sub Saharan markets could negatively affect our assessment of PPC's country risk and business risk profile in the medium-to-long term, despite the significant growth potential and higher profitability than more established, mature markets,” S&P added.

The company’s planned capex is largely covered by separately allocated committed facilities, S&P pointed out.