EUR 300.00 For Business Accounts Only

TITAN CEMENT | Manageable Headwinds

Focus on input costs – A spike in energy and freight costs in H2 2021 has been weighing on the stock price lately, as these headwinds are set to affect the group’s operating performance in the near term. The impact was evident in Q3, with group EBITDA -17% yoy following +4% yoy in H1. The combination of disruptions in supply chains (further exacerbated by strong demand post the reopening of economies) and some geopolitical events have been key reasons behind these adverse trends. Looking ahead, we believe it is reasonable to expect normalization in the following quarters as demand returns to normal and supply bottlenecks gradually ease.

Headwinds seem manageable – In our view, these headwinds should not cause investor trepidation. Firstly, several input costs which spiked in previous months have started to retrace lower, although they are still at elevated levels vs a year ago. Secondly, most of the regions where the group operates are in a very good shape allowing producers to impose higher prices to their customers, effectively passing through the increased input costs, partially or fully. Thirdly, looking at the breakdown of the group’s cost structure, the portion of energy and distribution costs (combined) is less than a third of total operating expenses

Our sensitivity analysis – We run a sensitivity exercise to assess the capacity of Titan to protect its operating margins mitigating the impact of costs inflation. As per our exercise, a 10% to 20% increase in input costs could be easily absorbed through a 2% to 5% increase in prices, while even a 30% to 40% increase could be absorbed, albeit most likely over a longer period of time.

Lowering estimates to reflect cost headwinds – We have lifted our revenue estimates by 3% on average over 2021-23, mainly on the assumption of higher prices mitigating the increase in input costs. That said, we have lowered our EBITDA estimates by 6.5% on average for the same period, on the assumption of higher energy and freight costs (20-30%). Our FCF estimates are lowered accordingly, leading to a slower net debt reduction than previously envisaged.

Reiterate ‘Buy’, PT at €17.9 – We have lowered our 12m TP to €17.9 from €20.0 previously reflecting lower EBITDA estimates as well as lower peer valuations. Our TP is derived by a combination of a DCF (50%) at 8.8% WACC, which generates a fair value of € 18.5, and peer valuation based on EBITDA (50%), which generates a € 17.3 value per share. We retain a positive stance for Titan as we anticipate re-rating upon improvement of visibility regarding input costs. Titan stands c20% lower than pre-COVID levels trading at 5.9x 2022e EV/EBITDA, c10% discount to peers. Our TP values the stock at 6.8x, suggesting ca 22% upside potential.