Company update - Cemex Latam Holdings: Downgrading to HOLD on negative cement market outlook
February 23, 2018 (Investorideas.com Newswire) We are downgrading CLH to HOLD based on a moderation in our expectations from 4G projects (See 4G Challenges Remain) and a negative surprise in 4Q17 results (a 5% q/q volume drop after a 2% q/q price increase). Furthermore, the market in Panama displays scarce space for upside in terms of prices and should have flattish volumes for 2018. In regards to Costa Rica, presidential elections and the entrance of Elementia should pose challenges. Also, we are bearing in mind that CLH could be considered a higher risk share due to its lack of dividends paid and the ongoing issues with Maceo. For these reasons, we are applying a 20% discount to our DCF price (equivalent to the price drop of the week of the announcement of the Maceo scandal). All in all, we acknowledge there is fundamental value in CLH, but current market conditions prevent us from being more positive about the share.
Still no recovery in the cement market in Colombia. Cement dispatches fell to ~12mn tons during 2017, with a 1% y/y decrease, and concrete production had a 10.5% y/y drop. Construction GDP growth was -0.6% during 4Q17 and -0.7% for the full year. Licensed square meters continue to be lower than in 2016, and housing inventories keep accumulating. In terms of civil works, presidential elections should cause a slowdown, while 4G projects should demand ~200k tons (a mere 1.6% of current yearly cement demand for Colombia). Also, oversupply should continue, even in the absence of cement imports in Colombia (currently at ~1.2 mn tons). Cement plants are at a 65% utilization, and there is new capacity from Corona and Holcim (1.85 tons/year for 2018).
The markets in Panama and Costa Rica do not have a positive outlook either. The market in Panama is facing a flattish scenario in terms of demand, with projects that drove volume increases already advanced and no new projects expected to start at the moment. The market in Cost Rica is showing a slight improvement in terms of consumption, but presidential elections are going to slow down activity. Furthermore, the entrance of Elementia to the market should set a cap and pressure margins.
Current circumstances prevent us from being more positive about the share in spite of fundamental value. Cement and construction markets are in a negative moment with no clear signs of recovery, and the issue with Maceo creates a reluctance to be overweight on the share. That said, we do believe there is fundamental value in CLH, and it is discounted when compared to peers.
For charts, tables and the full report, see the pdf file
+(571) 3394400 Ext. 1025
Juan Camilo Dauder
+(574) 2042525 Ext. 4155
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