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TITAN CEMENT | Profitability step-up on solid foundations; top pick

EBITDA reset to >€500mn with market yet to fully price in the rebased profit level – 2023 has turned out markedly above our and consensus expectation, with Titan Cement primed to deliver a whopping 60% yoy EBITDA growth in FY23, some 30% above consensus a year ago. With demand trends remaining healthy in Titan’s markets, we expect the group to remain on a growth trajectory vs the rebased level of profitability and now envisage mid-single digit EBITDA growth through to 2026e. Although the stock has bounced 63% YTD, it is yet to reflect the solid outlook with the stock currently trading at just c4x 2024e EV/EBITDA, namely at c20% discount vs EU peers. At these levels, we argue the stock is sufficiently de-risked while the risk-reward skew looks positive, and, as such, we add the stock in our top picks list.

Growth driven by favourable positioning and benign market dynamics – Demand shows no signs of slowdown with Titan’s 9m’23 volumes up 2-4%, notwithstanding the price hikes implemented throughout 2023. On a regional basis, softening in US residential is more than outweighed by infrastructure spending (IIJA and IRA acts) which recently kicked-off, with the two new domes in Florida effectively increasing local capacity. In Greece, residential and large construction projects underpin top-line growth, with the new pre-calciner in Kamari entailing elevated profit margins, while in SEE profitability is underpinned by normalized energy prices and cost cutting initiatives. Lastly, East Med benefits from improved performance in Turkey, with optionality stemming from exports to the US and stabilization of FX.

What we learned at the Investor Day 2023 – Looking ahead, mgt’s focus is naturally on the rapidly growing markets, namely the USA and Europe, with mgt targeting €3bn revenues by 2026, with a tilt in sales mix towards aggregates and RMC. On profitability, mgt guided for >10% EBITDA CAGR through 2026 vs 2022 levels, doubling of EPS to €3.0 and dividend growth in tandem with EBITDA, however given the stellar 2023 and healthy demand dynamics coupled with self-help actions on the cost side, 2023 numbers are already ahead of the 2026 guidance. Although we do not expect mgt to revise upwards its guidance imminently given its conservative stance, we argue that c€600m EBITDA by 2026e is within reach. Mgt also guides for leverage near 1.5-2x, despite the €250-300m annual capex envelope, with ROIC >12% by 2026. Lastly, ESG and digitalization remain at the core of Titan’s strategy, with mgt aiming for 30.7% alt fuels substitution rate and 11% lower specific CO2 emissions (vs 2022).

Material upgrades, PT to €25.3, top pick – In light of strong market dynamics further boosted by operating efficiencies, we raise our 2023-25 EBITDA estimates by 28-29%, ultimately estimating 2025e EBITDA near €570mn. This filters through to a >50% upgrade to our EPS and an increase in our PT to €25.3. Our PT places the stock at 4.8x 2024 EV/EBITDA, namely at the low end of the EU peer group valuation, thus leaving a positive risk-reward skew given Titan’s higher growth profile than peers, thanks to its exposure in markets with strong demand dynamics. The investment case is also underpinned by a compelling c4-5% yield through 2025e.