Morningstar | Margins Contract More Than We Expected in HeidelbergCement’s 3Q; Reducing Fair Value Estimate. See Updated Analyst Note from 09 Nov 2018
After HeidelbergCement issued a profit warning a month ago, the company reported third-quarter earnings on Nov. 8. Driven by rising energy costs, HeidelbergCement’s operating EBITDA fell 2% to a little over EUR 1 billion. Cement operating EBITDA margins contracted nearly 250 basis points, a much larger decline than we had anticipated. As a result, we’ve further cut our full-year EBITDA forecast. Although cement producers can generally pass costs on to customers, price increases tend to lag, which means that margin compression is likely to linger in the near term. In addition to lower margins, the company’s full-year capital expenditure guidance of EUR 1.3 billion is nearly 20% higher than we had forecast.Due to these changes, we’ve reduced HeidelbergCement’s fair value estimate to EUR 81 per share from EUR 88. Our narrow moat rating remains intact. The company's moat reflects its ability to regain lost margin through price increases over time. Nevertheless, near-term cash flows will be weighed down on lower cement margins.
Shares have traded materially lower over the last few months, but we think the stock is oversold and offers attractive risk-adjusted upside. Although spiking energy costs will hurt cash flows in the near term, we expect the company to eventually regain lost margin through higher prices.
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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