16 April 2013

The share price of small cap Sephaku Holdings has rocketed by 80% since January – proving that when the fundamentals look good, investing in a company whose main productive capacity is not even built is not too much of a leap of faith.

Sephaku is a black-owned investment company whose core investments are a 36% stake in Sephaku Cement and 100% in Metier Mixed Concrete, a smaller, but complementary cement business.

It is the possibilities inherent in Sephaku Cement that are getting investors so excited.

The company is two thirds of ?the way through the building of its R3.2bn cement producing facility in Aganang, in the North West and milling plant in Delmas, Mpuma- langa. This is the first new cement facility to be built in the country since 1934 and production is expected to begin in October this year.

The company is run by Peter Fourie,  Duncan Leith and Duan Claassen, old hands in the cement industry, and is backed by Nigeria’s Dangote Cement, Africa’s biggest cement producer.

The cement industry, along with the construction sector, has been in the doldrums since 2010, but activity levels are rising. Yes, supply exceeds demand, but that is expected to reverse within five years, Sephaku Holdings CEO Lelau Mohuba told delegates at the small and mid cap companies’ conference in Cape Town earlier this year. “The anticipated shortfall in cement capacity is due to lack of investment and shortage of high quality limestone deposits,” he says.

Sephaku, which has mineral rights and mines its own limestone, will be the lowest cost producer of cement in the country.

Its plant is being built using the latest technology, which is not only more environmentally friendly but more efficient, too.

This means the company should be able to compete on price with its better established competitors PPC, Afrisam and Lefarge.

“Cement is a fantastic business,” says Peter Armitage head of investments at Anchor Capital.

“Pricing is high, margins are wide and cash flow is good because you are not investing heavily in stock ?– the raw material comes out of ?the ground.”

Sephaku Cement’s management team has years of experience in the cement industry, he says. The company has an additional advantage in that its competitors all have highly indebted balance sheets and cannot afford a price war.

The industry is growing at 4% pa and Hugan Chetty, construction sector analyst at Afrifocus Securities expects that Sephaku could reach the 20% market share required to sell its production within two to three years. “The market should be receptive to them. There has not been significant price competition from the current players, who grew up in a regulated cartel.” He notes though, that Sephaku has no intention of entering into a price war.

Written by: Sasha Planting

The Citizen
16th April 2013