Fitch affirms Pacasmayo's ratings; outlook stable

Fitch affirms Pacasmayo's ratings; outlook stable
19 January 2015

Fitch Ratings has affirmed the following ratings for Cementos Pacasmayo SAA):
• Foreign currency Issuer Default Rating (IDR) at 'BBB-';
• Local currency IDR at 'BBB-';
• Senior unsecured US$300m notes due 2023 at 'BBB-'.

The Rating Outlook is Stable.

Key rating's drivers

Solid business position
Fitch said the ratings reflects Pacasmayo's solid business position, as the only cement producer in Peru's northern region which has resulted in high margins, low leverage and solid liquidity. "The small size of the cement market in the north, as well as the difficulty of logistics 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 favorable outlook for Peru's cement industry over the medium term driven by Peru's positive macro-economic and business environment," the rating's agency said.

During the 12 months ending September 2014, Pacasmayo sold 2.3Mt, maintaining its historical market share in Peru's cement industry of approximately 22 per cent. Positive for credit quality, the market structure has remained stable in Peru for more than a decade. Pacasmayo's low cost production and extensive distribution network which is customized to the specificities of the Peruvian cement market give the company strong competitive advantages and barriers to entry, Fitch adds.

It further highlights that EBITDA margins of Pacasmayo are among the highest within the industry globally. Pacasmayo's EBITDA during the 12 months to the end of September 2014 was PEN336m (US$120m), resulting in an EBITDA margin of 27%. Fitch expects EBITDA margins to remain similar in 2015 and improve to above 27 per cent in 2016 due to operating efficiencies gained at its new plant in Piura. Fitch notes that 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 favorable sales mix of bagged (89% of demand) to bulk (11% of demand) cement. The company's cash flow generation benefit from cost savings and increasing production when the new plant starts operations during mid-2015.

Strong liquidity
As of Sept. 30, 2014, the company's cash position was PEN665m (US$229m) with no short-term debt. The company's cash is committed to finish its new plant and fund other projects while maintaining a minimum cash of at least US$30m. Pacasmayo's liquidity is strong as a result of its solid cash position and manageable debt payment schedule.

Free Cash Flow to remain negative for 2015
Pacasmayo is expected to generate negative free cash flow (FCF) during 2015 due to the execution of its capex plan in order to complete the new cement plant in the city of Piura. The company anticipates starting operations at Piura during the second half of 2015, with a total investment of approximately USD$386m. US$150m of capex remains to be spent on the new plant in 2015.

Continued growth in Peru's cement industry
GDP growth in Peru increased just 1.8 per cent YoY in 3Q'4, sharply lower than the 5.1 per cent growth seen in 1Q14 largely due to falling copper exports and a decline in investment. Despite the lower than expected GDP growth in Peru, Fitch forecasts GDP growth to be 3.7 per cent in 2014, which remains above the 'BBB' median. The construction sector is expected to grow at approximately 4.0-5 per cent due to higher employment levels, increasing purchasing power of consumers, and the abundant infrastructure and housing deficits in the country.

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