Equity Analysis /
Mexico

Grupo Cementos de Chihuahua: Quarterly Report 2Q22: Greater pressure on profitability confirmed

  • GCC reported in line with expectations, with a solid sales advance but lower margins due to higher costs

  • Based on favorable market dynamics and costs control strategy, the company reiterated its 2022e guidance in EBITDA

  • We reiterate our Buy recommendation, although we suggest cautiousness given the stock price volatility

Jose Itzamna Espitia Hernandez
Jose Itzamna Espitia Hernandez

Senior Equity Research Analyst, Infrastructure, Materials and Transportation

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Banorte
4 August 2022
Published byBanorte

Greater pressure on profitability confirmed

  • Cement company figures were mixed, in line with expectations, registering a solid advance in sales for better volumes and prices, but lower margins in the face of higher costs

  • Even though GCC reiterated its 2022e guidance in EBITDA and shows an attractive valuation (5.2x vs. 6.1x sector median), in the short-term stock volatility will continue due to environment challenges

Positive demand dynamics and prices are offset by cost pressure. GCC's revenues in 2Q22 were boosted by solid cement and concrete volumes in the US with variations of +6.0% and -0.6%, respectively, benefiting from greater dynamism in industrial warehouses construction and the oil sector. On the other hand, in Mexico, concrete volumes rose 13.8% and cement volumes dropped 2.3%, with greater activity in maquiladora plants and industrial warehouses construction. In the aggregate, better prices were recorded in local currency, and in Mexico also in dollars. In this way, sales grew 11.6% y/y, in line with our estimate. Thus, EBITDA advanced 2.5% y/y, and margin fell 2.8pp y/y to 31.1%, slightly lower-than-expected, given higher production costs and expenses, fuels in Mexico, and freight. Meanwhile, majority net income increased 11.4% y/y, due to operating performance and higher financial products. The outlook remains positive despite the complex environment. The company reiterated its 2022e EBITDA guidance based on favorable market dynamics and the strategy focused on efficiencies and cost and expense control. This, coupled with a healthy financial situation (-0.4x ND/EBITDA) and an attractive valuation, reaffirms our Buy recommendation for GCC. However, given the inflationary pressures environment, disruptions in supply chains and lower economic dynamism expectation, we suggest caution when taking positions, as the stock price could continue to face periods of high volatility.