Equity Analysis /
Mexico

Grupo Cementos de Chihuahua: Quarterly Report 3Q22: Sound strategy reduces pressure on profitability

  • GCC showed an increase in revenues due to higher volumes and prices, and a lower-than-expected contraction in margins

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

  • Despite solid fundamentals, current challenges will continue to generate volatility in the stock price

Jose Itzamna Espitia Hernandez
Jose Itzamna Espitia Hernandez

Senior Equity Research Analyst, Infrastructure, Materials and Transportation

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Banorte
26 October 2022
Published byBanorte

Sound strategy reduces pressure on profitability

  • During 3Q22, the company showed a solid advance in revenues due to higher volumes and product prices, as well as a lower-than-expected contraction in margins

  • GCC reiterated its 2022e EBITDA guidance and trades at an attractive valuation (5.0x vs. 6.2x sector median), although we believe volatility in the stock could continue in the face of economic challenge

Positive demand and pricing backdrop mitigates cost pressures. GCC’s revenues benefited from annual increases in US cement and ready-mix volumes of 2.2% and 7.7%, respectively, supported by increased activity in the oil and gas sector. Meanwhile, in Mexico, ready-mix volumes continued to increase 2.4% y/y, although cement volumes declined 3.2% y/y, driven by higher demand from the residential sector and the construction of both maquiladora plants and industrial warehouses. Overall, prices were better in local currency terms, and in Mexico in dollar terms as well. As a result, sales grew 11.8% y/y to $353 million, in line with estimates. On the other hand, EBITDA rose 6.6% y/y to $117 million, with the margin declining 160bps y/y to 33.3%, due to higher production costs, higher fuel costs in Mexico, higher freight costs, and a less favorable sales mix. This margin exceeded our expectations, reflecting lower pressure from higher product prices and expense control. On a net basis, majority income increased 18.4% y/y, due to operating performance and higher financial income. Demand should remain solid for the year-end. Once again, the company reiterated its 2022e EBITDA guidance based on favorable market dynamics and a strategy focused on efficiencies and cost and expense control. While we reiterate our positive view for the cement company due to solid fundamentals, highlighting a healthy financial position (-0.6x ND/EBITDA) and an attractive valuation, current challenges, and the possibility of a recession in 2023 could impact growth, which will continue to generate volatility in the stock price.