Morningstar | HeidelbergCement’s 2018 Marred by Spike in Energy Costs and Bad Weather in U.S.; Shares Undervalued
In October 2018, HeidlebergCement issued a profit warning that results from current operations before depreciation on a like-for-like basis (RCOBD) would decline on a low- to mid-single-digit percentage due to a sharp rise in energy costs and bad weather in the United States. On Feb. 19, 2019, the company reported preliminary full-year 2019 results, with RCOBD declining by 2.3%. Given the company’s previous warning, shares were actually up nearly 4% after the earnings announcement.Despite the headwinds the company faced, underlying demand looks strong. Volumes were up for every building material on a like-for-like basis, leading to 8% revenue growth for HeidelbergCement on a like-for-like basis. Excluding North America, the company saw EBITDA growth in all of its other regions, a turnaround from recent years. The company provided general guidance of margin improvement in 2019.
Given that the company did not release full-year results and guidance is roughly in line with what we expected, our forecast and fair value estimate of EUR 81 per share remain intact for narrow-moat HeidelbergCement. We plan to update our model when the company releases full results on March 21.
Shares have recovered more than 20% since the beginning of the year, which we believe suggests subsiding fears of an economic slowdown. We still see HeidelbergCement shares as undervalued. Shares traded near our fair value estimate as recently as May. And while the company struggled in 2018 with energy costs and weather, these headwinds are short term in nature and underlying demand remains strong. Barring repeated headwinds that are out of the company’s control, we think it is positioned to see a meaningful rebound in RCOBD in 2019.
HeidelbergCement is engaged in the production and distribution of cement and aggregates, concrete and building products. Co.'s product range is complemented by downstream activities, such as ready-mixed concrete, concrete products, and concrete elements; in some countries, asphalt and building products, such as bricks and roof tiles, lime, or sand-lime bricks, are also manufactured. Furthermore, Co. provides services such as worldwide trading in cement and coal by sea. Co.'s products are used for the construction of houses, infrastructure, and commercial and industrial facilities.
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