Equity Analysis /
Mexico

Grupo Cementos de Chihuahua: Flash: Odessa, Texas plant expansion due to favorable market dynamic

  • GCC announced the expansion of Odessa, its Texas plant, which will represent a ~17% rise in total cement production

  • Additionally will generate operating efficiencies, the investment will amount $750 million starting operations in 2025

  • We view as positive that GGC is positioning better in the US market, where higher infrastructure spending is expected

Jose Itzamna Espitia Hernandez
Jose Itzamna Espitia Hernandez

Senior Equity Research Analyst, Infrastructure, Materials and Transportation

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Marissa Garza Ostos
Marissa Garza Ostos

Head of Equity Research

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Banorte
5 August 2022
Published byBanorte

GCC announced the expansion of Odessa, Texas plant capacity, stemming from an accelerated US growth market environment. With it, the annual cement production capacity would be increased by over one million metric tons (vs. 507,000 tons currently in Odessa), which would represent about 28% growth in the US and ~17% in the total (also considering Mexico). Additionally, it would reduce greenhouse gas intensity by 13%.

The cement company said that the project will generate freight savings (vs. the plant located in Chihuahua from where they require product to meet the demand), in addition to optimizing the cost structure and the network by relocating cement shipped to this region from the Samalayuca, Chihuahua, and Pueblo plants, to other markets in which it operates with an optimized freight cost. The total investment will be $750 million, with a double-digit return on investment, according to the company, which will be financed with cash flow and is expected to begin operations in mid-2025.

Positive implication: Although the expansion data had been released in the 2Q22 results presentation, we consider favorable the fact that the company is preparing and positioning itself for a market that continues to grow and has a positive outlook, given the higher infrastructure spending expected in the US. We also believe that the investment should not be a major issue for the cement company, given its financial situation (-0.4 ND/EBITDA), and the continuous cash flow generation. While we reiterate our positive outlook for GCC due to strong fundamentals and an attractive valuation (FV/EBITDA of 5.2x vs. 6.7x sector median), in the short-term, in our view the current challenges, particularly around higher costs derived from a persistently high inflationary environment and the economic slowdown expectation, which could even lead to a recession, will continue to generate volatility in the stock price.