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Morningstar | A Weaker Mexican Outlook Than We Expected Leads Us to Cut Cemex’s FVE

During the first quarter, Cemex saw double-digit volume declines for cement, concrete, and aggregates both year over year and sequentially in Mexico. Although we had anticipated weakness in Mexico due to the new presidential administration's cancellation of major infrastructure projects, the 14% like-for-like decline in operating EBITDA over 2018 surprised us. Low-single-digit price increases weren’t enough to offset the much larger declines in volume.

Cemex now expects mid-single-digit declines in cement and concrete volumes and a low-single-digit decline in aggregates volume. Just a quarter ago, the company expected flat volume for all three products. Given that Mexico is Cemex’s single most important country, a weaker outlook has a significant impact on our valuation. Although the company expects newer infrastructure projects and public housing plans to replace canceled projects, the timing and scale are uncertain, leaving the outlook weaker.

In addition to the weaker Mexican outlook, we’ve lowered our exit multiple assumption to 6 times, reflecting lower free cash flow conversion than we had previously forecast. As a result, we’ve lowered our fair value estimate to $7 per ADS from $8.50 for narrow-moat Cemex.

Shares look undervalued, though we reiterate our very high uncertainty rating for Cemex, exacerbated by its currency risk, its high financial leverage, and significant exposure to Mexico.