Value in white
Value in whiteINITIATION COV.
The core of Cementir business model is to combine the higher growth and margin potential of white cement, a niche market of some 20mt of production, with grey cement, aggregates, ready-mixed concrete and waste activities.
We initiate coverage of Cementir with a Buy recommendation and c.40% upside.
Cementir has a c.€1bn market cap.
Business model and market cap
Cementir is about white cement, a niche that offers growth and better margins as a higher value-added product. It controls 20% of the addressable market.
Cementir makes money because it is a specialist in a niche business too small for mega players to invest in. The white cement niche is seeing steady growth but white cement is relatively scarce and thus can command higher prices and as a result can be exported, which is unusual in the commodity side of construction materials. While part of the higher realisation prices is absorbed in higher energy costs, the business is intrinsically a better FCF generator than the grey variety. The company appears to have been nimble in expanding by acquisition and extending its network (and thus its logistics efficiency), has been careful about capital spending and the management is good at running a mid-sized operation. The obvious limit is that with 20% of the white cement market already, growing more rapidly than the market is likely to entail declining ROCEs.
The white cement business model is similar to that of Sika and Imerys. The family-controlled business appears to be run as a tight ship with a long-term view.
Cementir has a c.€1bn market.
Recommendation, upside and main earnings drivers
We initiate coverage of Cementir with a Buy recommendation and c.40% upside.
Main earnings drivers:
A stable Denmark and Belgium/France (about 40% of grey and white cement capacity combined) should continue to offer the company the ability to deploy cash in other countries thanks to a very high cash conversion rate.
Improvements expected in Turkey (some 40% of grey and white cement capacity) and Egypt (8% of grey and white cement capacity) over the coming years: in Turkey, a bottom should have been reached in Q2 19 and Q3 19 should be better with a slightly positive profitability thanks to the replacement of the CEO and the implementation of a cost-cutting exercise of about €10m; while Egypt is about white cement, namely an export-driven business, and where the number of players has fallen from three to two meaning a price increase is fairly likely.
Integration of LWCC, a US white cement company, with sales synergies (used as an import hub for Egyptian and Danish exports) and re-positioning through pricing actions in order to gain market share and reach the 50% target of white cement exports to production.
Need to know
There are three essential points to note:
Cementir will see a trough in its net profit in 2019.
The business is family-owned and controlled with a long-term strategy in place.
The free float is low at slightly less than 30%.
Next trigger
Like Vicat, Cementir is a family-driven business that has maintained a solid balance sheet through the cycle with its net debt/EBITDA always below 3x. It is a remarkable story in that the management avoided making costly acquisitions during the top of the cycle (2007-08) and, hence, the need for fresh-but-dilutive capital at the bottom of the cycle (2008-09).
We evaluate the likelihood of an acquisition in grey cement as more likely than another buyout of a white cement business but, as always, any acquisition would take place at a fair price and be strategically-located with well-maintained assets. Past deals helped to develop a white cement franchise with strong and recurrent cash flows (mainly linked to the renovation market) which could be the cash cow to a careful expansion in the bigger but more cyclical grey cement market.
Cementir Holding is an Italian multinational company that produces and distributes grey and white cement, ready-mix concrete, aggregates and concrete products.
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