Cemex: Cement

The Company

Cemex (CEMEXCPO), is a holding company primarily engaged in the production, distribution, marketing and sales of cement, ready-mix concrete, aggregates, clinker and other construction materials in more than 50 countries. The company is one of the largest cement groups globally, based on its annual installed cement production capacity of around 95m tonnes in 2012. Further, in addition to being the largest ready-mix concrete group worldwide, with annual sales volumes of about 55m cu metres, Cemex is also one of the largest aggregates companies, with annual sales volumes of around 159m tonnes (2012).

According to company sales, Northern Europe accounts for 27%, followed by the US (22%), Mexico (21%), South America and the Caribbean (15%), the Mediterranean (10%), and Asia (4%).

The importance of the cement industry lies in its critical significance for the construction sector, which bears a close relationship with the state of the economy in general. The industry is characterised by high barriers to entry and intensive use of capital. In industrialised countries, cement is bought in bulk, whereas in emerging market countries it is purchased by the bag. Cemex has positioned itself as a major brand of quality, creating brand loyalty in its different markets.

In order to optimise the company, Cemex expects to increase profitability through a coherent business strategy, a focused and efficient management team, as well as a diversified and integrated business portfolio, with tools to create sustainable value and strengthen its balance sheet. After enduring a deep crisis from 2008 to 2009 and going through a stage of stabilisation between 2009 and 2011, the company has shown a renewed period of growth since 2012. After several years of adjustments and improvements to its operational base, and upon completion of a refinancing process, Cemex’s current positive outlook coincides with ongoing economic recovery in the US, which is one of its main markets based on installed capacity. Indeed, Cemex was heavily affected by the mortgage, fiscal and debt crisis that took hold in the US. The company is at present having an operational “transformation” based on two aspects: improving operating performance by focusing on pricing, maintaining cost discipline, and outsourcing support activities; and optimising portfolio mainly by swapping assets to enhance value, and divesting assets where there is accretion and divesting in non-core businesses and non-operating assets.

With this transformation, the company predicts improving its return on equity to above 10% by 2016, up from the current level of below 5%. Cemex aims to create value via higher prices, with higher value-added services for customers, before observing a pick-up in volumes. Greater financial flexibility, with an extension in debt maturities (average life of 4.6 years, up from 2.9 in 2009), is despite a refinancing strategy that has not allowed the company to decrease its short-term debt level, mainly due to additional refinancing fees.

Development Strategy

In Mexico, Cemex’s profitability is expected to improve mainly due to a likely rebound of the country’s construction sector, boosted by government spending in infrastructure projects.

A key driver for growth could stem from the US’s economic recovery and the outlook for higher construction spending. Even though several emerging economies are facing difficulties – with Latin American countries no exception – the outlook for Cemex’s operations in South America and Asia is positive.

In 2014, we forecast Cemex’s revenues and earnings before interest, taxes, depreciation and amortisation (EBITDA) could increase 7% and 12.9% year-on-year, respectively, with an EBITDA margin of 18.3%, which is up on 17.4% in 2013. Cemex predicts reaching an EBITDA level close to $4.7bn by 2016, up from $2.6bn in 2013. This is based on two factors: firstly, an improvement in price policies, and, to a lesser extent, an increase in sales volume; and, secondly, the likelihood that the US market will have major contribution, both in relative and absolute terms. We have a 2014 year-end target price of MXN20 ($1.55) for Cemex.