BMI View: Cemex will remain an outperformer amongst major cement producers as is reflected by its relative market performance. Further opportunities are becoming available, both from consolidation in the global cement sector and a revival in construction activity in its core markets in Europe and Mexico.
Cemex's share price has undergone an impressive recovery very much in line with our expectations, reflecting improved market conditions. However, we believe that there is further upside ahead for the company's market performance, taking into account our forecasts for current and future trends in its main areas of operation, which we believe have not been priced in yet.
Key strengths include:
Exposure to continued growth in the US construction market.
Recovery taking hold in Cemex's European markets combined with asset swaps allowing for better synergies to improve margins.
Longer term revival in Mexico's construction sector.
Expansion in high growth markets following a period of debt reduction.
Consolidation of global cement market (including Holcim and Lafarge merger) could see Cemex improve strategic alignment and expand market share.
Cemex's impressive recovery was supported by a revival in the US construction market. Our long held view that 2012 would be the year the US construction sector returned to growth following a seven year recession, underpinned our view that despite mounting debt and negative revenues, Cemex would remain solvent and would enter a period of recovery (see, 'Cemex Refinancing Deal Provides Further Relief', 14 September 2012). This view has played out as reflected through the company's share price performance which is up 314% as of 12 May 2014, since in hit a low of MXN3.95 on 7 October 2011.
Despite major gains now priced in, we believe the share price will continue to trade within the upward trend channel that it entered in late 2011, and therefore we see strong potential for further gains in the share price over a multi-quarter horizon. Our forecasts for Cemex's core markets (US, Mexico, Western Europe) suggest a period of stability and growth, which will translate into higher earnings for Cemex and therefore will bode well for its market performance.
| Adhering To A Technical Pattern |
|Cemex Share Price, MXN|
Demand Picking Up
Cemex's bottom line will continue to be supported by the ongoing recovery in the US construction sector, with the country now accounting for 22% of total sales (as of 2013). Cemex's fortunes have been linked to the US construction sector since it acquired Rinker in 2007. Our forecast for 1.8% real construction industry growth in 2014, indicates continued expansion in US revenues.
| Recovery On The Cards For Core Markets |
|Cemex Sales, By Region, USDmn|
Outside of the US, Cemex has faced weakness in core markets in Europe and at home in Mexico. However, we believe 2014 will represent a turning point for construction activity in both markets, providing revenue growth for Cemex as cement and aggregates demand expands.
Mexico's construction sector has suffered from political transition and a crisis in the housing market and this has weighed on Cemex's domestic performance, with operating EBITDA for its Mexican operations declining 16% in 2013. Whilst demand for building materials remains weak (operating EBITDA contracted 5% y-o-y in Q1 2014), we believe the industry is poised for a recovery. The US$600bn National Infrastructure Plan will provide a strong foundation for investment across the construction sub-sectors between 2014 and 2018, and we expect this to feed through to building activity towards the end of 2014. We expect the construction industry to growth by 3.0% and 4.1% in real terms in 2014 and 2015 respectively.
| Main Markets Looking Better |
|Construction and Infrastructure Industry Value Forecasts|
A recovery in the company's European markets is already starting to take hold, and should provide a net positive to the company's 2014 annual results. Recoveries in residential markets in the UK and Germany are already filtering through to revenue gains for Cemex, whilst our expectation that the Polish construction sector will recover in 2014 following a steep contraction in 2013 bodes well for further European revenue growth. Following a contraction of 18% in operating EBITDA for Northern Europe in 2013, Q1 2014 results saw positive operating EIBTDA and a 21% y-o-y growth in sales.
| Residential Construction Recovery In Western Europe |
|Germany and UK Residential Construction Industry Value Forecasts, Real Growth (%)|
Supporting this improvement in European market conditions, Cemex is taking steps to better align its assets to capitalise on synergies. An asset optimisation deal announced in September 2013, is hoped to align assets and improve margins (see, 'Cemex European Asset Swap To Unlock Further Upside', 4 September 2013). The deal is currently being investigation by the European Commission with an announcement due by September 2014.
| Cemex Outperformance To Continue |
|Holcim, Lafarge, Cemex, HeidelberCement; Share Price Normalised As Of 03/01/2011|
Consolidation Provides Opportunities
In line with a broader period of consolidation and strategic alignment, the global cement industry could be on the verge of one of the largest alterations in its competitive landscape with the planned merger of Holcim and Lafarge (see 'Merger Plans Support Cement Industry Views' 9 April 2014). The net gains for rival cement companies like Cemex could be substantial, although much depends on the approval of the merger by various competition commissions, and this is therefore likely to be a drawn out process. Asset sales, which will be necessary for the merger to meet competition stipulations, could present rare opportunities for Cemex to expand its presence through the acquisition of productive operating assets and thus improve market share.
Cemex has not only seen an impressive recovery, but is also outperforming its cement industry peers. The company has benefitted from its strong geographic portfolio (including less exposure to the underperforming Asian region), as well as its more limited exposure to currency fluctuations compared to European peers.
Like other cement companies, Cemex has focused on reducing net debt over recent years, however, it also appears to be looking to maximise potential in growth areas. The company is relatively better placed to do this than its peers due to its better 2013 performance. News that it is expanding its operations in Nicaragua, a market with substantial shortages of building materials, implies it is able to capitalise on opportunities in growth markets. This bodes well for its ability to benefit from the Holcim Lafarge merger, as well as continue to outperform its more debt focused peers.