Morningstar | HeidelbergCement’s Reduced Guidance Brings Its 2018 Outlook in Line With Our Prior Forecast
On Oct. 18, HeidelbergCement issued a profit warning for 2018. Although management continues to expect volume and sales to come within prior guidance, it expects like-for-like current operations before depreciation to grow by a low- to mid-single-digit percentage. This is down from prior guidance of a mid- to high-single-digit percentage. The company cited U.S. weather challenges and excessive energy cost inflation that could not be passed on by price increases this year.Despite the company’s announcement, we’ve made no changes to our forecast. Following HeidelbergCement’s second-quarter earnings release in which rising energy costs led to a more than 100-basis-point operating EBITDA margin contraction, we had reduced our full-year operating EBITDA margin forecast to 4%, down from 8%. The company maintained its full-year guidance at that time, so today’s announcement brings management guidance in line with our view.
Our longer-term forecast also remains unchanged. We think the company will be able to pass on production cost increases to its customers, but that it will take more than a few quarters for this to happen. With our outlook intact, we’re maintaining our EUR 88 fair value estimate for narrow-moat HeidelbergCement.
Shares dropped sharply on the profit warning announcement, but view this as a second drop on the same news. Shares dropped 17% during the second-quarter earnings announcement in which margin headwinds first appeared, which we believe more than captured the near-term challenges to the stock.
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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