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
