Cemex Latam Holdings BANCOLOMBIA ANALYSIS: COLOMBIAN EQUITY RESEARCH – Quarterly Results 1Q15 Financial Results Affected by Colombian and Panamanian Operations Financial results came below our expectations with a 16.3% decrease in sales, mainly affected by FX devaluation, as a result lower volume coming from the Colombian region, and higher sales to the Panama Canal that had a negative impact on profitability. On the other hand, operating EBITDA fell 20% against 1Q14 also affected by currency fluctuations and lower sales in Colombia; as a result the EBITDA margin changed -158 bps. The contraction in Colombian profits was mainly driven by their decision of increasing prices 4% vs. 4Q14 leading to a decrease in market share which impacted cement volumes by 15% during the period. It is worth bearing in mind that on a YoY basis, cement prices declined 1% in local currency meaning that price declines came during 2H14. Panama displayed the same pattern with net sales dropping 6% vs. 1Q14, reaching USD72mn; operating EBITDA fell 11%, posting USD29mn for the quarter (the EBITDA margin stood at 39.9%, -260 bp vs. 1Q14). Domestic demand of gray cement increased 9% against 1Q14, while that of ready-mix fell 9% and aggregates’ remained flat. Higher volumes were demanded by the Panama Canal vs. 1Q14 when the project experienced some trouble. Costa Rica; the positive side of financial results with an increase of 410 bp in the EBITDA margin from 41.6% in 1Q14 to 45.7% in 1Q15, mainly because of strong demand. Volumes of cement, ready-mix and aggregates increased 8%, 10%, and 45% YoY, respectively, thanks to important infrastructure projects such as the Chucás hydroelectric plant and the Northern Inter-American Road project. The top line stood at USD43mn, up 31%, while EBITDA closed the quarter at USD20mn, up 33% YoY. Our view We believe financial results were below expectations which mean the company could feel some downward pressure given the strong competition in Colombia which is having an impact on profitability margin. With this in mind, CLH consolidated results showed a decrease of 8% in cement volumes, while those of ready-mix and aggregates were up 4% and 8%, respectively, far from their 2015 guidance which aims at increases of 3%, 14% and 13%, respectively, for FY15. We expect further improvements in the coming quarters as the devaluation of the Colombian peso should have a positive impact on local demand as import products turn more expensive, leading to a potential recovery in profitability margins in the Colombian regional. Financials & Multiples Net sales Operating Income EBITDA Net income P/E EV/EBITDA P/BV Dividend Yield 2011 2012 2013 2014 2015E 1.269.801 278.018 347.917 161.223 N.A. N.A. N.A. N.A. 1.591.748 480.014 547.621 264.799 13,3 9,4 2,9 0.0 1.750.116 535.296 632.681 264.102 16,4 9,1 3,2 0.0 1.724.710 481.131 576.942 273.398 16,3 9,8 3,2 0.0 1.745.334 499.807 604.174 273.491 13,2 7,8 2,2 0.0 Source: Bancolombia 1 Building materials I April 23, 2014 BUY Overview Target Price (COP) Previous TP (COP) Closing Price (Apr 23, 2015) (COP) Upside 22,253 21,644 13,440 +66% 52 Week Range (COP) ord Outstanding Shares (mn) ord Market Cap (COPmn) Floating ord ADV 12 months ord (COPmn) Dividend Yield ord Total Return ord Bloomberg 13,200 – 20,300 556 7,473,370 23.8% 7,298 0% 66% CLH CB CLH vs. COLCAP 12 Months (base 100) 125 115 105 95 85 75 Apr-14 Jun-14 Aug-14 Oct-14 CLH CB Dec-14 Feb-15 COLCAP Source: Bancolombia, Bloomberg Analysts Name: Phone: E-mail: Germán Zúñiga Saavedra (574) 6047045 [email protected] Name: Phone: E-mail: Jairo Julián Agudelo Restrepo (574) 6047048 [email protected] Apr-15 Cemex Latam Holdings I Building materials April 23, 2015 Conference Call Main Points As guidance on a consolidated basis, CLH expect increases of 2%, 10% and 10% in cement, ready-mix and aggregates, respectively, below the guidance published at the beginning of the year. According to management, this is a more conservative guidance taking into consideration the strong impact lower oil prices could have on the Colombian economy. Maintenance and operating capex are expected to be around USD45mn in 2015, mainly for the grinding facility in Antioquia and projects in Costa Rica and Nicaragua. Maintenance works are scheduled for the second quarter which could have a negative impact on financial results and margins. In general, the current FX depreciation has helped offset the strong competition from imported products in the north coast of Colombia which would help improve margin and volume dynamics for the coming quarters. The company is currently running at 90% of installed capacity, for which expansion projects play a key role for future growth rates and cement supply for the 4G concession program. Colombia: Decline in volumes in Colombia was driven by their decision to increase prices which affected their market share. According to management, during March the performance was much better than in January and February, for which they expect this negative impact to vanish during the coming quarters, recovering profitability and volume dynamics. In addition, Colombian currency devaluation also played against profitability given their costs attached to COP. The company is on schedule regarding their Colombian investment projects with the intention of opening their new clinker line by 2Q16 in Maceo, Antioquia. Colombia has approved funds for around USD14bn for infrastructure, transportation and housing, which would keep positive demand dynamics. In addition, it’s likely to be around USD21bn in additional funds to those approved which could have an additional impact on the Colombian economy and cement demand. These funds are divided in USD8.8bn for the first wave of the 4G concession program, USD1.1bn for works in 39 airports, and USD4bn for Government housing initiatives for the period 2014-2018. In addition, USD8.9bn could be used by municipalities for PPPs (private and public initiatives) in further waves. Regarding housing initiatives in Colombia the company expects a meaningful (mid-single digit) supply of cement and materials, attached to four different housing programs which totalized 420,000 units with an investment of USD4bn. The Colombian Government has been committed to low-income housing projects, for which around 1.5mn people will be employed, and cement demand will be important. Prices in Colombia will smoothly recover as seen from 4Q14 to 1Q15 (4% on a sequential basis for the local currency) as a result the market share will recover as well during the follow months. 1. . 2 2 Cemex Latam Holdings I Building materials April 23, 2015 Panamá: In Panama, excluding volumes used for the canal project construction, the company increased sales by 4% YoY vs. 1Q14. More frequent maintenance in one of their kilns in Panama, added to the higher proportion of sales to the canal, were the reasons for the 260-bp decrease in EBITDA margin for the quarter, moving from 42.5% in 1Q14 to 39.9% in 1Q15. The Government announced their intention to invest USD11bn in a 5-year public investment that includes subway expansion, interstate highways, and water management projects, among others. Table 1 – 1Q15 Financial Results Comparison USD 000 Net revenues COGS Gross profit Operating profit EBITDA Net income EPS 1Q15A 353.838 183.606 170.232 90.187 112.426 43.791 79 1Q15E 388.849 186.049 202.800 109.851 134.788 33.692 61 Var%. -9,0% -1,3% -16,1% -17,9% -16,6% 30,0% 30,0% 1Q14 422.753 214.748 208.005 118.066 140.999 54.620 98 Var%. -16,3% -14,5% -18,2% -23,6% -20,3% -19,8% -19,1% 48,1% 25,5% 31,8% 12,4% 52,2% 28,3% 34,7% 8,7% -404,4 -276,2 -289,0 371,1 49,2% 27,9% 33,4% 12,9% -109,2 -244,0 -157,9 -54,4 Gross margin Operating margin EBITDA margin Net margin Source: CLH 1Q15 financial results, Grupo Bancolombia Table 2 – Regionals’ Detailed 1Q15 – Operating Information EBITDA Margin 1Q15 Colombia Panama Costa Rica Resto de CLH 33,7% 39,9% 45,7% 30,3% 1Q14 38,2% 42,5% 41,6% 27,1% Volumes Growth Rate Var bp 450 260 (410) -320 Cement -15% 9% 8% -9% Prices in Local Currency Ready-Mix Aggregates 5% -9% 10% -19% 5% 0% 45% 60% Cement Ready-Mix -1% -3% 5% 4% Source: CLH 1Q15 financial results, Grupo Bancolombia 1. . 3 3 3% -2% -7% 5% Aggregates -1% -2% -5% 8% Cemex Latam Holdings I Building materials April 23, 2015 Financial Multiples – Below Peers and Historical Levels CLH is currently trading at 7.03x EV/EBITDA forward and 11.23x P/E ratio forward, above Latin American cement companies, where P/E and EV/EBITDA stand at 20.35x and 8.79x, respectively. Table 3 – Regional Financial Multiples Company Country Cemargos* CLH* Pacasmayo Unacem Bio-Bio Moctezuma Chihuahua Cemex SAB Average Latam Colombia Colombia Perú Perú Chile Chile Mexico Mexico P/E EV/EBITDA P/BV 20,85 11,23 12,81 10,67 8,51 20,71 57,65 20,35 10,01 7,03 7,50 7,41 6,55 11,67 10,40 9,71 8,79 1,44 2,19 1,21 0,96 0,54 4,78 1,02 1,27 1,68 * Bancolombia estimations Source: Bloomberg, Bancolombia These multiples could be supported by the new green field project in Antioquia, Colombia, opening more possibilities for production, backing up current plants with high installed capacity levels. Furthermore, if we analyzed CLH’s current multiples against its own historical trade, it seems to be currently trading below its own track, surpassing one standard deviation, which could send signals that is trading at a discount against its own history, supporting our BUY recommendation. Figure 1 – EV/EBITDA 12 Months Forward 14,0 13,0 12,0 11,0 10,0 9,0 8,0 7,0 6,0 5,0 4,0 Jul-13 Figure 2 – P/E 12 Months Forward 24 22 20 18 16 14 12 10 8 Oct-13 Jan-14 EV/EBITDA Fwd Apr-14 Jul-14 Average Oct-14 +1SD Jan-15 Apr-15 -1SD Oct-13 Jan-14 RPG fwd Source: Bancolombia Source: Bancolombia 1. . 6 Jul-13 4 4 Apr-14 Average Jul-14 Oct-14 +1SD Jan-15 -1SD Apr-15 Cemex Latam Holdings I Building materials April 23, 2015 Equity Sales Equity Research Rupert Stebbings Jairo Agudelo Equity Markets Vice President Head of equity research [email protected] [email protected] +574 6045138 +574 6047048 Natalia Agudelo Parra Juan Camilo Dauder Sánchez Equity Sales Head Energy Analyst [email protected] [email protected] +574 6045144 +574 6049821 Maria Paula Cortés Durán Fixed Income Head Financial & Small Cap [email protected] Pablo Caicedo +571 353 6600 ext. 37387 VP International Business [email protected] Diego Buitrago Aguilar +571 488 6000 Energy Analyst [email protected] Economic Research +571 7463984 ext. 37307 Juan Pablo Espinosa German Zúñiga Saavedra Head of Economic Research Infrastructure and Industry Analyst [email protected] [email protected] +571 7463991 ext. 37313 +574 6047045 Alexander Riveros Federico Perez Garcia Senior Economist Oil & Gas Junior Analyst [email protected] [email protected] +571 7463980 ext. 37303 +574 6048172 Research Assistant Claudia Restrepo Research Editor [email protected] +574 404 3809 1. . 5 5 Cemex Latam Holdings I Building materials April 23, 2015 TERMS OF USE This report has been prepared by Analysis Bancolombia a research and analysis department at Grupo Bancolombia. 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