PPC AfriSam Merger Presentation II 23 October 2017
Items covered in this document Share Price Performance Historic Earnings Performance Rationale for the Merger Merger ratio Competition remedies AfriSam Capex Process and timelines Annexure 2
Share price performance Share price has rallied since announcements of (indicative) offers - the unaffected PPC share price pre any offer announcements was R5.45 (as of 1 September 2017) 8.00 7.00 AfriSam cancels Heads of Terms News flow of AfriSam s pending new offer and international equity partner Fairfax offer submitted to PPC Announcement on 4 Sep indicates two further indicative offers PPC announces receipt of expression of interest from Dangote Cement Withdrawal of interest by Dangote Cement 40.0 35.0 6.00 Prudential, PIC & Value increase shareholding 30.0 5.00 Unaffected share price = R5.45 25.0 4.00 20.0 3.00 15.0 2.00 10.0 1.00 5.0 0.00 0.0 Source: Capital IQ Volume Share price 3
Items covered in this document Share Price Performance Historic Earnings Performance Rationale for the Merger Merger ratio Competition remedies AfriSam Capex Process and timelines Annexure 4
Turning point or race to the bottom still underway? EBITDA margin 40.6% 33% 36.2% 31.0% 29.7% 27.7% 25.3% 24.8% 24.7% 18.9% Fwd PE multiple 13.0x 10.4x 12.2x 13.1x 14.8x 14.8x 14.2x 13.9x 9.3x 13.1x S/P growth 60.00 (31%) 12% (3%) (26%) 24% 4% (3%) (40%) (69%) 11% 3.00 50.00 2.50 40.00 2.00 30.00 1.50 20.00 1.00 10.00 0.50 0.00 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 Share price (LHS) HEPS (RHS) Broker forecast HEPS (RHS) 2017 -- Source: Capital IQ 5
Historic Analyst EBITDA Forecasts ZAR millions 5,000 Actual FY13-17 Forecasts Current Forecasts 4,000 3,000 2,830 2,000 2,141 2,409 1,000 2,183 2,358 2,290 2,290 2,065 0 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Source: Capital IQ 6
Historic Analyst EPS Forecasts Rand Cents 500 Actual FY13-17 Forecasts Current Forecasts 400 300 200 100 0 159.0 158.0 131.0 66.0 37.5 38.0 46.0 66.0 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Source: Capital IQ 7
Items covered in this document Share Price Performance Historic Earnings Performance Rationale for the Merger Merger ratio Competition remedies AfriSam Capex Process and timelines Annexure 8
Major cement players and some M&A activity Declining global demand resulting in worsening capacity utilisation, lower EBITDA margins and increased M&A activity in the sector Annual Production Capacities 1. CNBM (China): > 400m tons 2. HolicimLafarge (Europe): ± 340m tons 3. Anhui Conch (China): > 200m tons 4. Jidong (China + RSA): > 100m tons 5. Heidelburg (Europe): > 120m tons Top 100 in the world Dangote (1 st in Africa) > 40m tons AfriSam (RSA & E/Africa): 5,9m tons PPC (RSA & Africa): 11,4m tons The last 5 years has seen M&A Activity in China India Europe Latin America Africa (not that significant though) 9
Rationale for PPC merger with AfriSam As outlined in the SENS announcement released by PPC on 13 February 2017, we believe the merger will achieve significant benefits: Consolidated cement champion SA economic and social responsibility BEE Potential to compete against international consolidated multi-nationals and regional powerhouses National champion meeting need for consolidation - keeping the SA identity alive in the cement industry Complementary portfolios with limited overlap in South Africa Encourages local employment Unlocks South African economic growth through infrastructure development Promotes skills development and training within South Africa Creates a sustainable future for the South African cement industry Pro-forma 17% BEE ownership from PIC and Phembani shareholdings No dilution to existing PPC shareholders Alternative BEE solutions could be costly, inconveniently timed and potentially dilutive Case study: Sasol lost 7% of its value on news of the replacement BEE transaction Synergies Optimization of route-to-market Ability to procure goods and services better as a larger player Rationalisation of central overheads and operational costs International cement mergers set precedent for synergy unlock Average annual pre-tax cost-saving estimated at R800m 10
Items covered in this document Share Price Performance Historic Earnings Performance Rationale for the Merger Merger ratio Competition remedies AfriSam Capex Process and timelines Annexure 11
Merger ratio delivers a premium to PPC across multiple metrics Proposed merger ratio of 64.6 : 35.4 (enterprise value basis) 58 : 42 (equity value basis) The merger ratio compares to: PPC AfriSam Unit Implied enterprise value ratio 64.6% 35.4% % Installed Cement Capacity 1 64.3% 35.7% % Proportional Cement Capacity 64.5% 35.5% % EV / Installed Capacity 1 387 1 389 R/t EV / EBITDA 2 6.7x 6.2x x Other relevant metrices: Sales Tonnes ratio Proportional Sales Tonnes (over ramp up period) ratio EV / Sales Tonnes EBITDA / Sales Tonnes Notes: 1) 38% of Habesha volumes 2) Stripping out the value of the deferred tax asset attributable to AfriSam 12
Merger ratio Why is a like-for-like multiple applied? AfriSam benefits from R4bn capital injection plus c.r3bn PIK conversion pre merger which directly impacts on equity and PAT for purposes of determining merger ratio - Assessed tax loss of c.r2bn (R555m deferred tax asset) guaranteed by PIC directly impacting equity value Multiples supported by further ratios as depicted on previous slide What happened to the previous valuation work? Original valuation work influenced by certain objectives Qualitative factors of additional capital injected into AfriSam not considered Commercial aspects of operations in Rest of Africa yet to be overlayed onto merger ratio Any other issues? If the transaction is implemented as an asset disposal by AfriSam, as opposed to a share exchange, the benefit of the assessed loss (as guaranteed by the PIC) will be foregone AfriSam structure will be cleaned up and simplified pre any merger Tanga tax charge (estimated to be c.r60m) taken into account in merger ratio 13
A R4bn equity injection would benefit all shareholders Balance sheet Improved leverage of below 1.5x vs. Dangote (1.5x) and Lafarge Africa (2.5x); allows for access to cheaper funding to pursue strategic and operational objectives Optimal CAPEX to take advantage of growth, optimise production cost as opposed to cutting back c.r250m in FY18 & FY19 1 Improved ability to refinance R1.6bn long term debt maturing in FY19 Liquidity Eliminate potential need to use revolving facility for DRC first sponsor obligations: Annual obligation (capital + interest) = c.r460m Remaining deficiency funding = c.r280-350m Utilise AfriSam free cash flow previously used to service debt to be distributed as dividends to merged HoldCo 1) PPC Investor Day Presentations September 2017 (and 2016) 14
PPC s SA Cash Flow inadequate for DRC Funding needs ZAR millions 2018 2019 2020 Notes HSBC Forecast (05 June 2017) 1,383 1,578 1,825 UBS Forecast (23 Aug 2017) 1,153 1,443 1,586 Southern Africa EBITDA (Average) 1,268 1,511 1,706 Includes South Africa and Botswana Less: Discount to Average SA EBITDA - - - Assumed no discount to analyst forecasts Net SA EBITDA 1,268 1,511 1,706 Less: SA Taxes (123) (177) (224) Excludes taxes on ROA Less: SA Changes in Working Capital - - - Assumed no changes in SA WC, excludes ROA Southern Africa Post-Tax CF from Operations 1,145 1,334 1,482 SA Capex (600) (800) (1,000) Per Sep 2017 capex guidance; FY18 ~R300mm down from Jun 2017 guidance DRC Shortfall Funding (319) - - Per Sep 2017 guidance: $15mm funded + $10mm expected through Mar 2018 DRC EPC Fee (312) - - $24mm, currently being negotiated Southern Africa CF From Investing (1,231) (800) (1,000) SA Debt Service (216) (1,816) (316) Per FY17 debt schedules DRC Debt Serviced Funded FY18 (442) Per Sep 2017 guidance: $17mm funded + $17mm expected through Mar 2018 DRC Debt Service Funded FY19/20 (398) (420) Per UBS' downside scenarios (i.e. 0% EBITDA Margin in FY19/20) Southern Africa CF from Financing (658) (2,214) (736) Southern Africa Net CF (744) (1,680) (255) Cash Balance Beginning SA Bank Balance (including Pula) 454 100 100 SA Net CF (744) (1,680) (255) Net Proceeds from Debt Issuance/Refinance and/or Share Issuance 390 1,680 255 Ending Rand Balance 100 100 100 Assumed min R100mm cash balance Cumulative Debt Issuance/Refi and/or Share Issuance 390 2,070 2,324 Potential cash shortfall: Based on public information, there is a substantial cash shortfall over the next 3 years plus 15
Sensitivity Analysis: Cumulative PPC Cash Shortfall through FY20 Cumulative Cash Shortfall Through FY20 ZAR millions Total FY19/20 Funding to DRC (Rmm) Discount to Analyst Forecast for SA EBITDA 2,324 0% 5% 10% 15% 20% 25% UBS Downside 818 2,324 2,549 2,773 2,997 3,221 3,446 Mid-Point 562 2,068 2,292 2,516 2,741 2,965 3,189 UBS Base 305 1,811 2,036 2,260 2,484 2,708 2,933 16
Considerations for Rest of Africa 40% of PPC s total installed capacity Country capacity, mtpa Excess supply In-country / operational considerations DRC 1 2.5 150% Dampened economic growth (political instability & deflated commodity market) Reduced ramp up rate and ability to distribute in market Pricing pressure due to oversupply in conjunction with the above Market oversupply expected to continue till beyond 2020 Ethiopia 15.5 80% Working Capital constraints coupled with questionable plant quality Raw material supply constraints Minority share with limited ability for strategic input Importing pressure from oversupplied Tanzania market Rwanda 0.6 15% LOM constraints of ~12 years Tanzania 11.0 120% Oversupplied market Pricing pressure Zimbabwe 2.6 110% 0% GDP growth results stemming from political uncertainty and economic policies dampens demand Liquidity issues stemming from legislation preventing cash generated to be moved out of country 1) Considering Western market only * Demand / Capacity values based on The Global Cement Report Twelfth Edition 17
Items covered in this document Share Price Performance Historic Earnings Performance Rationale for the Merger Merger ratio Competition remedies AfriSam Capex Process and timelines Annexure 18
Competition Landscape Background The South African cement industry is currently facing significant challenges as a consequence of several factors, including: Increased competition from foreign owned cement producers (Sephaku and Mamba) with further foreign owned firms (Osho/Heidelberg) anticipated to enter the South African cement market within the next two years Significant levels of overcapacity with existing levels of current production capacity exceeding demand by approximately 5 million tonnes, with additional capacity anticipated to come on line within the next two years. Demand growth is currently negative with limited spending by government on new infrastructure and very low investment by private sector in commercial buildings. Price earnings pressure which is caused primarily by overcapacity in the market and imports. Concentrated retail sector in South Africa (one of the major customer segments for cement products), which has significant bargaining power. With a view to a potential merger with PPC, AfriSam engaged competition lawyers and economists to assess the proposed transaction in order to determine whether it was likely that it would receive regulatory approval. The lawyers and economists performed an extensive analysis over a two year period and the parties also engaged the regulatory authorities. Both parties have previously publicly stated that they are confident of a positive outcome. Two stage approval process could also address other concerns 19
Competition Landscape Rationale Inland Post-transaction, the total capacity of rivals to a combination of PPC and AfriSam will be equal to approximately 70% of total demand in the inland area. This provides a powerful constraint on any combination of PPC and AfriSam as more than three quarters of the combined entity s inland sales could be lost to rivals if the combined entity sought to raise prices Western Cape PPC is currently the only cement producer in the Western Cape. AfriSam has an undeveloped limestone deposit at Saldanha in the Western Cape a decision is yet be made on this deposit. Imports potentially serve as an important competition constraint on PPC in the Western Cape (particularly in respect of bagged cement). Eastern Cape PPC currently has the only cement plant in the Eastern Cape AfriSam currently transports cement from its plant at Ulco in the Northern Cape into the Eastern Cape. Imminent proposed new entry by a large competitor, Osho (in conjunction with Heidelberg), which plans to develop a new grinding facility at Coega, which could supply a large proportion of demand in the Eastern Cape. 20
Competition Landscape SA Regional markets Operational Capacity, mtpa Central AfriSam 1.5 Gabarone Lichtenburg * * * * Johannesburg Polokwane Nelspruit CIF Inland PPC 4.5 Sephaku 2.7 Lafarge 2.2 AfriSam 1.5 Mamba 0.8 CIF 1.3 Saldanha Kimberly 2.4 mtpa 11.6 mtpa * * * Durban Port Shepstone Richards Bay KZN NPC 1.5 + Imports Western Cape PPC 1.1 * + Imports Cape Town Port Elizabeth East London Eastern Cape Osho 0.6 PPC 0.3 + Imports * PPC AfriSam Sephaku Lafarge NPC Mamba Grinding plant only 21
Items covered in this document Share Price Performance Historic Earnings Performance Rationale for the Merger Merger ratio Competition remedies AfriSam Capex Process and timelines Annexure 22
Capex spend has been consistent and in line with industry benchmarks AfriSam Group Capex spend, Rm Expansion Replacement Rationalisation SHEQ Capex spend, Rm 2007-2011 2012-2016 Expansion and diversification 980 2 217 Replacement 740 865 Rationalisation 116 237 SHEQ 106 123 Total 1 943 3 442 1,048 1,215 442 600 378 262 261 292 535 353 200 7 200 8 200 9 201 0 201 1 201 2 201 3 201 4 201 5 201 6 Up to 2016, replacement (maintenance) Capex spend has been consistent and in line with industry benchmarks to ensure plant performance is maintained The spike during 2013 2015 is attributable to the Tanga Kiln 2 project totalling R1 825m 23
Items covered in this document Share Price Performance Historic Earnings Performance Rationale for the Merger Merger ratio Competition remedies AfriSam Capex Process and timelines Annexure 24
Timing Fair and Reasonable to be completed by the end of October, partial offer and merger circular sent to shareholders by 22 November in line with the TRP extension granted Date Activity 24-26 October Round II PPC Shareholder Roadshow 30 October Completion of Investec Fair and Reasonable 22 November Offer /Merger Circular sent to PPC shareholders November PPC Interim Results December Shareholder Meeting 25
Items covered in this document Share Price Performance Historic Earnings Performance Rationale for the Merger Merger ratio Competition remedies AfriSam Capex Process and timelines Annexure 26
Annexures BEE cost precedents 27
Level of facilitation in precedent BEE transactions 1 Precedent BEE transaction cost analysis is shown alongside The level of facilitation is measured either by the explicit upfront cost, for example in the case of a discount on the shares, or on an option-pricing basis Notes: Precedent BEE transactions indicate that the level of facilitation has averaged around c.2.7% of market value for a 10% BEE transaction (1) Source: RMB analysis (2) Considered an outlier and unlikely that a similar transaction could be concluded in the current regulatory environment Company BEE stake Facilitation Implied cost for 10% stake Company BEE stake Facilitation Implied cost for 10% stake BANKS Spar 10.0% 2.5% 2.5% Absa 10.0% 2.8% 2.8% Clicks 10.0% 1.9% 1.9% African Bank 10.0% 4.3% 4.3% HEALTH FirstRand 10.0% 3.2% 3.2% Medi-Clinic 15.0% 3.5% 2.3% Standard Bank 7.5% 2.8% 3.7% Netcare 10.0% 3.2% 3.2% Nedcor 9.5% 3.7% 3.9% Aspen 12.0% 3.8% 3.2% CONSTRUCTION Adcock 13.0% 3.6% 2.8% Group Five 26.1% 6.0% 2.3% INSURANCE Murray & Roberts 10.0% 3.4% 3.4% Mutual & Federal 11.0% 3.1% 2.8% PPC 15.0% 3.2% 2.2% Santam 10.0% 1.0% 1.0% CONSUMER GOODS LIFE ASSURANCE Distell 15.0% 2.0% 1.3% Discovery 7.0% 2.2% 3.1% Tiger Brands 4.0% 1.1% 2.6% Liberty 9.4% 2.7% 2.9% SAB Miller 8.5% 2.4% 2.8% Old Mutual 5.6% 3.2% 5.6% GOODS & SERVICES MINING Bidvest 15.0% 1.0% 0.7% Goldfields SA 15.0% 2.9% 1.9% Edcon 10.6% 2.9% 2.7% Anglogold 1.9% 1.0% 5.2% Woolworths 10.0% 1.6% 1.6% Angloplat 22.0% 6.8% 3.1% Nampak 10.0% 2.6% 2.6% Kumba 2 58.0% 3.0% 0.5% Imperial (Lereko) 7.3% 0.5% 0.7% OIL AND GAS Sappi 4.5% 2.2% 4.9% Sasol 10.0% 2.8% 2.8% Tongaat 26.0% 3.8% 1.5% TELECOMMUNICATIONS Hulamin 15.0% 3.3% 2.2% Vodacom 6.3% 1.8% 3.2% Massmart 10.0% 2.3% 2.3% MTN 4.0% 1.1% 2.8% Pioneer Foods 13.5% 1.4% 1.0% AVERAGE 12.3% 2.7% 2.7% 28