Destruction of worth on the cement producer PPC: Numbers that make your eyes water – Ted Black

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PPC is a JSE listed company supplying cement and related products across Africa. It’s the kind of business you would expect to do really well as countries develop. The company fared poorly when Covid-19 containment measures stalled operations, but the pandemic appears to have uncovered hidden vulnerabilities. This is underlined by the in-depth analysis of the numbers by independent analyst Ted Black. He presents his data to highlight that PPC performed poorly in evaluating the returns on assets under management and explains why the company’s share price hasn’t fallen far by 700% over the past year. Black notes that the destruction was massive and the company was valued at around R5 billion, down from R30 billion in 2007. PPC stock has shown signs of rebounding in recent months, which Black sees as a sign that it may be draining its swamp. – Jackie Cameron

Marketing the company (part 1)

By Ted Black *

Share buybacks and employee option programs are headlines today. However, many see them as a means of creating value, not creating value, for good reason. If the main purpose of stock options is to get management and employees to follow in the footsteps of an “owner” – think like a long-term shareholder, think a role model is Warren Buffett, and then act like a true entrepreneur, who puts customers first, they don’t seem to work that well.

Ted Black

Buffett says, “I like companies that I can understand … that narrows it down by 90% … anyone can understand.” He holds up a coke bottle. “It’s a simple business, but not an easy one. I don’t want an easy business for competitors. I want someone with a moat around a valuable castle and the responsible duke to be honest, capable and hardworking. “

“People buy a stock and look at the price the next morning to decide if they’re okay or not … that’s crazy. You’re not buying a stock … you’re buying some of the ownership of a company. That’s what it’s all about. “

How many company stock option program members have this been explained? Do they understand how valuable the free equity they receive is, let alone what the critical numbers are building the moat and castle? As Buffett says, “I want a company that is very profitable and then I can generally see where they will be in ten years. If I can’t, I don’t want to buy it. “His only message to managers of companies that Berkshire Hathaway owns or invests in is:” Widen the moat! “

That means throwing crocodiles and sharks in through brilliant business design, low cost, good service, high product quality, patents and careful selection of the competition venue – to have a “game plan” that does the right jobs – opportunity and productivity – driven ones.

Asset productivity and profitability determine the long-term value of a company. The only valid benchmarks for management intent and results are productivity metrics – not a stock price. The Return on Assets Managed Financial Model (ROAM) below contains the most important of these. It is a simple, but certainly not simplistic, method of measuring the “economic gap”.

The three most important measures of operational management are ATO, the ROS% – both are linked to sales – and the ROAM%. This is followed by the “ready-for-sale” cost of the goods sold (COGS) – usually around 80% or more of the total costs and costs (OPEX).

This graph shows the correlation between EBIT ROAM and Company Value (VOF), measured as market capitalization ÷ total assets. The sample size is 142 companies at the JSE.

The link is clear. You don’t need complex measures like EVA or cash return on invested capital to get the message across to people. In addition, all you need to do is focus on the assets on the balance sheet and stop at the operating result or earnings before interest and taxes on the income statement (EBIT).

The productivity moat and castle begin with assets and their sales productivity. This begs the first strategic marketing question: How many Margins do we generate for each edge of the assets we own? This is ATO – the turnover number. Here’s a graph that shows how it’s the cornerstone of building defensive barriers to productivity …

To illustrate, let’s use an example from one – PPC Cement, a very wealthy company that has faced a lot of headwinds in recent years – not least one that has blown away its protective cement cartel umbrella.

The first measure, a hybrid one, is the “cost of capital per ton of cement sold”. If you need more inputs than your competitors to produce and sell a ton of cement, it will get in the way before you even start competing.

The next graph shows the decline in PPC asset productivity in relation to property, plant and equipment since 2012.

The connection between ROAM and VOF correlates perfectly with 1.0.

The three charts paint a picture that I bet less than 5% of PPC managers, let alone all employees with stocks, would have seen or explained them. They also reveal one of the biggest barriers to productivity improvement in any business – financial ignorance. It spreads like a virus from the boardroom to the lowest levels – a problem, but also an educational opportunity with a huge payoff.

That was the moat. Now for the last stage – the castle. After their annual results are announced, CEOs and CFOs perform a key role for the company, a marketing role. Similarly, with product and service marketing managers – make it easy for customers to buy.

The job of marketing the company is to influence the perception of the capital market and maximize its value in the minds of long-term investors and lenders. Made credible, it lowers the risk, the cost of capital, and increases the PE ratio and VOF.

Two questions start the process:

  • How do we want to be seen?
  • For which opportunities and successes do we want to be valued most?

If the results show that the company is a low cost producer and / or most differentiated, capital markets are likely to view it as a low risk, high return investment. By doing this, you dispel a common management myth that when all things are equal, higher risks are rewarded with higher returns at the investment, industry and company level.

The reality is that successful entrepreneurs are very disciplined and know that winners will get into a high return, low risk position. Losers are forced into high risk, low return risk. PPC seems to be there today, but hopefully it is now starting to drain the swamp it is in.

Next up is share buybacks … also part of the corporate marketing task.

  • Ted Black is a Mentor and coach, He uses the ROAM financial model and a 100-day promotion Project method to exactly and convert fuzzy problems and possibilities in high precision, team-driven Projects. Theand The goal is personal growth;; to Jack learn fast and to measure upe with tangible results. you are Small scale management – – the rule is Talk less, act more. black has written and co-authored several books including “Who Moved My Share Price?” edited by Jonathan Ball.

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