Pricing strategy mitigates profitability pressure
CEMEX's 1Q22 results showed progress, in line with expectations, due to solid market dynamics, mainly in prices, although with lower margins
Even though revenues perspective is favorable, we are reducing our EBITDA estimate by 5%, given greater profitability pressures as a result of environment challenges
We set a PT of MXN 14.00 -FV/EBITDA 2022e 5.5x vs. the industry median of 6.2x. The attractive valuation despite the stock’s adjudgment still doesn’t reflect fundamentals. We recommend BUY
Increases in price partially offset cost challenges. The company’s figures registered growth due to the solid demand that, in addition with a restricted supply, reflected into higher product prices in local currency and in dollars (doble digit average in cement), although Cemex also showed margins pressures. Thus, cement volumes decreased 1%, while concrete and aggregates rose 6% and 7%, respectively, supported by the US and EMEA performance. The previous led to a revenue increase of 11.7% y/y. In turn, EBITDA rose, to a lesser extent and in line with estimates, 2.5% y/y given higher energy costs, freight, and imports, therefore the margin fell 1.6pp to 18.3%. Meanwhile, FCF was more negative and the leverage ratio stood at 2.8x vs 2.7x in 4Q21. Current global challenges, highlighting lower economic dynamism, higher energy costs and raw materials, and disruptions in supply chains, have moderated the growth outlook. However, we consider favorable that the company has kept its 2022e EBITDA guidance unchanged, supported by the price increase strategy that will help mitigate higher costs. This, coupled with a very attractive valuation, reaffirms our favorable opinion for CEMEX.
2022 estimates update
Company strategy would partially offset inflationary costs pressures. After a 2021 of CEMEX figures important recovery, where the 1S21 showed a very favorable performance, which slower down towards the 2S21, environment risks have been accentuated in the beginning of 2022. Among the main risks, we highlight inflationary pressures, driven by supply chain disruptions and the rise in raw material prices, also exacerbated by geopolitical conflicts, which have led to a more hawkish posture by several central banks. In this way, global economic slowdown concerns remain latent and even more so with the pandemic situation presenting again in China.
By incorporating the figures for the quarter and the updated outlook released by the company, for this year we expect the demand for construction materials will remain solid, alongside a restricted supply in most of the operating regions where it operates, would continue to benefit a positive price environment for products. Thus, together with additional strategies, such as the use of alternative fuels that in 1Q22 represented 33% of the total, expecting to reach 36% by the end of 2022, as well as the digital transformation (Working Smarter) that will further greater efficiencies, will help to alleviate higher costs. However, the outlook suggests that profitability would be pressured, especially in this 1S22, while for 2S22, a less difficult comparison base and price increases should drive a better performance. We recall that CEMEX objective is to achieve an EBITDA margin ≥ 20.0% vs. 19.3% L12m. On the other hand, we keep mentioning the US’s infrastructure plan, which will benefit the building materials industry as soon as the end of this year.
Considering the above mentioned, the firm reiterated its 2022e EBITDA increase estimate of a mid-single digit, as well as stable consolidated cement volumes, while expecting an increase in concrete and in aggregates of a low digit to medium. It also foresees an increase of <s>35% (vs. prior 19%) in energy cost per ton of cement produced, a fixed assets investment of </s>$1.200 billion (vs. prior $1.300 billion), working capital expenditures of <s>$150 million, taxes paid by </s>$200 million (vs. prior <s>$250 million) and a reduction in the cost of debt of </s>$10 million.
In this sense, our 2022 projections assume volumes’ advances at a consolidated level of +0.1% in cement, +2.2% in concrete, and +2.3% in aggregates. We estimate solid product prices increase in local currency and, considering the exchange rate fluctuations that play a key role, we also expect an average rise in dollar prices from regions of high digits. Thus, we anticipate an increase in sales of 9.0% y/y, standing at $15.863 billion. As we have already mentioned, inflation costs will predominate during the year, in addition to a less favorable mix sale, which will be partially offset by operating efficiencies, therefore we expect a lower EBITDA growth of 3.7% to $ 2.985 billion (-5% vs. previous), showing a margin contraction of 1.0pp to 18.7% (vs. 20.0%e previously).
Broken down by region... For Mexico’s operations, considering a difficult comparative base, we expect bagged cement demand to moderate. Meanwhile, the formal sector should remain with improvement signs mainly driven by housing and commercial and industry segments. The last one, due to the manufacturing growth, warehouses, onshoring, and the construction of logistic networks. Thus, the average annual increase in volumes would be 1.6% (-3% in cement), while in prices we estimate a double-digit advance in dollars. EBITDA would rise 3.3% y/y to $1.202 billion, with a margin of 31.9% (-1.7pp), due to higher costs, particularly energy.
Regarding the US, we expect the residential sector to continue driving the strong demand that has been reflected in the beginning of 2022, which together with levels of limited production utilization, should continue to encourage price initiatives. Thus, we project an average volume growth of 2.8% y/y and a double-digit price increase. Meanwhile, we forecast a 3.5% y/y rise in EBITDA to $789 million, with a decrease in profitability (-1.2pp to 16.3%). We reiterate the additional boost that the infrastructure plan will represent in the long run for the building materials sector.
Regarding Europe, Asia, the Middle East and Africa, we believe growth demand to continue (average increase in volumes of 1.2%), which will support higher prices; however, we suppose this to be partially offset by higher costs, so we anticipate a positive variation of 3.9% y/y in EBITDA to $702 million. Finally, in South America and the Caribbean, we estimate that housing, self-construction, and infrastructure and tourism projects continue to reflect solid results, with year-over-year increases in volumes of about 5% on average, as well as higher prices due to the positive dynamics of supply and demand. EBITDA growth would be 2.7% to $454 million.
Solid capital structure will remain. Even though the expectation of moderate results progress, we believe that the constant search of the portfolio optimization (with a greater presence in developed markets), the focus on making a the business more sustainable, which also translates into savings, and strategies executed to achieve greater financial flexibility, should translate into a healthy financial balance sheet. Currently, it has a solid maturity profile, with an average life pro forma of 5.7 years and being the first important maturity until 2025 ($956 million, representing ~11% of total debt). Regarding the leverage indicator, we anticipate that by the end of 2022 the company will have a Net Debt/EBITDA ratio of 2.2x (vs. 2.8x in 1Q22), which should continue to support the path to obtain the investment grade.
Valuation and PT 2022e of MXN14.00. We recommend BUY.
To derive CEMEX’s theorical value, we use the multiples valuation methodology. It should be noted that current environment risks, with lower economic growth expectations and greater inflationary pressures, have registered a negative impact in the shares of the companies in the sector, where specifically for CEMEX, the adjustment has been -34% so far this year.
Considering the above, CEMEX’s strategies to offset cost inflation, as well as solid demand and higher prices expected in the construction materials market, assuming a conservative stance and a 2022e target FV/EBITDA multiple of 5.5x, we obtain a 2022e PT of MXN 14.00 per CPO, which represents an estimated yield of 51.4%. This multiple represents a 11.3% discount vs the median of comparable companies 2022e of 6.2x, reflecting a very attractive valuation. Going forward, we consider that perspectives may even turn positive considering the additional infrastructure spending boost in the US, which coupled with the company strategies, would translate into longer term sustained growth. Therefore, in our opinion, CEMEX's fundamentals remain solid, so we recommend Buy, representing an attractive option to add to portfolios, given the strong adjustment in the stock, with a medium-long-term vision.
