Morningstar | Trimming Heidelberg’s FVE as Energy Costs Weigh on Margin Expansion; Shares Undervalued
HeidelbergCement reported a mixed second quarter. On one hand, volume for all products grew in the mid- to high single digits over the prior-year quarter on a like-for-like basis. As a result, the company generated like-for-like revenue growth of over 9% to EUR 4.8 billion and operating EBITDA growth of 3% to EUR 936 million.On the other hand, rising energy costs and continued weakness in the Asia-Pacific region weighed on margin expansion, leading to a 114-basis-point operating EBITDA margin contraction on a like-for-like basis. Through the first half of the year, the total energy cost per ton of cement has risen 8%. HeidelbergCement is aiming to limit energy cost inflation to the midsingle digits. This will be important to ensure that growing volumes and higher prices turn into higher profits.
We’ve revised our margin forecasts as a result of higher energy cost inflation than we had anticipated. We now expect operating EBITDA growth of 4% for 2018, down from our prior forecast of 8% and company guidance for mid- to high-single-digit growth. However, we anticipate in the long run, HeidelbergCement would be able to pass through most energy costs on to customers, so our long-term operating EBITDA margin is only slightly reduced to 22%. As a result of our changes, we’re trimming narrow-moat HeidelbergCement’s fair value estimate to EUR 88 per share from EUR 93.
In the last six months, shares have traded down significantly from about EUR 88 per share to under EUR 73 per share currently. Although margin expansion has been challenged by rising energy costs, we don’t see a catalyst that warranted the 17% share price drop. In fact, we now see shares as undervalued.
For more details on our country-by-country cement demand forecast, please see our Basic Materials Observer "Global Cement Outlook."
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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