On December 8 and 9, we attended the Cemtech Americas Conference in Orlando, Florida, where experts on the U.S. cement markets shared their expectations for the industry over the coming years. Their consensus is that the contraction in the construction markets is one of the worst ever and should be deeper and longer lasting than initially expected. Regarding the infrastructure program recently announced by President-Elect Barack Obama, consensus is that this is a positive measure; however, it is not expected to have a positive impact on cement consumption until 2010.
Based on this scenario, the chief economist of the U.S. Portland Cement Association forecasts that cement consumption should decline 12% in 2009 and an additional 5% in 2010, with no recovery until 2011. These estimates are below our expectations for Cemex’s volumes in the U.S. of a 7% contraction in 2009 and a 4% increase in 2010. He added that, because of the upcoming capacity increases in the U.S. and the low level of imports, the supply/demand imbalance could result in the closure of plants, as capacity utilisation stands now at 75%.
Cemex has rallied 157% from the low reached on November 21, likely due to the low valuation levels, the announcement of the U.S. infrastructure plan and expectations for a near-term announcement of debt refinancing, which could be an additional positive catalyst for the stock. Nevertheless, we maintain a cautious view on the stock, as the outlook for cement markets in the U.S., Spain and UK remains negative until 2010. In this report, we also present a sensitivity analysis of our target price to the potential cost of debt after the restructure and our expectations for 4Q08 guidance.
Valuation and Risks: Our YE09 target price is based on a DCF valuation using a discount rate of 10.3% (from 8.2% in March 2008) and a 1.0% terminal growth rate, and implies a target 2009E FV/EBITDA of 6.3 times. Risks include: a worse-than-expected impact of the subprime lending crisis on the U.S. and EU housing markets; changes in economic conditions where Cemex operates, and changes in exchange and/or interest rates, refinancing risk and derivative losses.
Gonzalo Fernandez, Banco Santander, Mexico