Jefferies initiates coverage of Cemex with Buy rating

Jefferies initiates coverage of Cemex with Buy rating
Published: 29 April 2010

Jefferies International is initiating coverage of Cemex with a Buy rating and sets a US$15 target, 25 per cent above the current share price. The broker believes the cement major will be a leveraged beneficiary  of a recovery in US housing markets.

About 85 per cent of the decline in Cemex’s profitability has been in the US, where its profits have fallen due to the collapse in the housing market in the southern states. In Jefferies’ view, these markets are beginning to recover.

Cemex’s 1Q EBITDA of US$515m, was well above both Jefferies estimates (US$477m) and Bloomberg consensus of US$478m, but mainly due to one off items: the sale of CO2 permits and the write-back of variable compensation provided in 2009 that was ultimately not paid.

According to Cemex’s management analysis, the decline in sales during the quarter was primarily due to lower volumes in Mexico, the US and Europe, partly offset by higher prices in several markets. The infrastructure sector continues to be the main driver of demand in most of the markets in which it operates.

Fernando A. Gonzalez, Executive Vice President of Planning and Finance, said: "The results of the quarter reflect the ongoing challenges posed by the effects of the global economic slowdown, as well as unfavorable weather conditions in the U.S. and Europe. Our ongoing efforts to reduce costs and optimise the efficiency of our operations are progressing well and we continue to build upon on our goals of becoming a leaner, more agile company. We continue to make progress in mitigating our refinancing risk and lengthening our debt maturity profile. Today, we are well placed to take advantage of the potential recovery in some of our key markets."

Cemex’s US businesses contributed US$143m to its 2009 EBITDA. Cemex’s US operations are concentrated in the south, amongst the states worst affected by the housing downturn. In Jefferies view, the US housing market is beginning to recover. It estimates a mid-cycle EBITDA contribution for Cemex in the US of US$1.5bn. Improvements have already been seen thus far in 2010. After a weak January and February, Cemex’ US volumes were up six per cent in March, the first increase since 2006. Cemex reported that volumes are up almost a double-digit percentage so far in April.

Mexico remains a key market. The country accounted for 44 per cent of Cemex’s EBITDA last year. Cemex’s low tax rate in Mexico makes its domestic market even more important to Cemex’s cash flow, according to Jefferies.

For full year 2010, EBITDA estimates by Jefferies remain at US$2.8bn, US$0.1bn below the company’s reiterated guidance and US$3.3bn for 2011.

High leverage
Cemex’ banking covenants require its net debt to operating EBITDA ratio not to exceed 7.75 on 30 June 2010. The covenant then decreases to 3.5 times for the half-year ending 31 December 2013. It was 7.3 at the end of March, which in Jefferies’ view is too high for comfort. The current offer to the perpetual shareholders at a discount to their issue price could reduce Cemex’s US$ of net debt by up to US$0.8bn and management confirmed that further divestments are being considered, forecasts Jefferies.