Fitch Ratings has affirmed the ratings of Peruvian producer Cementos Pacasmayo at 'BBB-'. The Rating Outlook remains Stable.
The ratings reflect the company's solid business position as the only cement producer in Peru's northern region. This position has resulted in high margins, low leverage and solid liquidity. The small size of the cement market in the north, as well as the logistical challenges found in this region, has limited the impact of imports and the probability a global company will enter the region in the near future. Further factored into the ratings is the completion of Pacasmayo's new cement plant in Piura and the favourable outlook for Peru's cement industry over the medium term driven by Peru's positive macroeconomic and business environment.
Key rating's drivers
Solid business position
Pacasmayo is the dominant player in Peru's northern region, where it provides essentially all of the cement sold. In the 12 months ending September 2015 the company sold 2.3Mt, maintaining its historical market share of approximately 22 per cent.
The market structure of the Peruvian cement industry has remained stable for more than a decade, which lowers business risk and provides sector stability. Pacasmayo's low-cost production and extensive distribution network, which is customised to the specificities of the Peruvian cement market, give the company strong competitive advantages and barriers to entry.
Completion of the Piura cement plant
Pacasmayo announced the completion of its new Piura cement plant, which began operating during the end of 3Q15. Total capacity is 1.6Mta and 1Mta of cement and clinker, respectively. Fitch notes that advantages of the new Piura plant include elimination of the need to import clinker for cement production, which should reduce cost of goods sold and improve EBITDA margins by approximately 300bps. Further, the location of the plant provides Pacasmayo with greater logistical flexibility in meeting the demands from different regions of northern Peru. The total cost of the project was US$365m and was approximately US$20m under budget.
Weakened liquidity expected to rebound
Pacasmayo's cash position declined to US$126m as of 30 September 2015 compared to US$192m at 31 December 2014 due to the funding of its new plant. Fitch expects Pacasmayo will end 2015 with a cash balance of around US$50m mainly due to dividends paid of approximately US$50m and stock repurchases of about US$32m during October 2015.
Pacasmayo is expected to return to positive free cash flow (FCF) generation, replenishing its cash balances to approximately US$60m by 2016 and US$90m by 2017. The company has no short-term debt, with its US$300m notes not maturing until 2023.
EBITDA margins improved to 32.6 per cent for the 12 months ending September 2015 compared to 27.3 per cent for the prior year period due to a reduction in imported clinker for its cement production coupled with a reduction in administrative expenses. Key factors in sustaining its high margins are access to low-cost energy, proximity of cement plants to limestone reserves, extensive and well-developed distribution network, and a favourable sales mix of bagged (89 per cent of sales) to bulk (11 per cent of sales) cement.
Pacasmayo's new Piura plant is expected to drive an additional 300bps in EBITDA margin improvement as the new plant will eliminate the need for Pacasmayo to import clinker, coupled with the state of the art technology and production efficiencies. The kilns at the new plant will be able to work with different types of fuels (municipal solid waste, biomass, shredded tyres, etc.), has its own quarry, and will lower transportation costs for imported raw materials with its proximity to a port.
Generation and improved leverage metrics
Fitch expects Pacasmayo to return to positive FCF generation during 2016 due to steady growth in operating cash flow coupled with a significant reduction in capex.
Favourable cement industry fundamentals
Fitch projects Peruvian cement consumption will increase by 2.5 per cent in 2016 due to increased demand from self-construction and recovery in public/private sector markets. Peru has US$40bn of private investment projects expected to be developed during 2016-17, but they could be delayed by weaker investor confidence in the period before the upcoming presidential election. While a severe El Niño would temporarily delay new projects in northern Peru, cement volumes would benefit from potential reconstruction projects.