Corporación Moctezuma
Corporación Moctezuma, S.A.B. de C.V.
Sergio Reynal
[email protected]
January 9, 2013
Bernardo Campuzano
[email protected]
Ariel Fischman
[email protected]
Corporación Moctezuma: A solid
foundations story
Stock price
Target price 2013
33.44
36.00
Potential expected return
7.7%
52-week range
We are initiating coverage on Corporación Moctezuma with a
YE2013 target price of MXN 36.00
25.17 - 33.44
Public market overview (mm)
Corporación Moctezuma is a defensive company, as it is a free
cash flow generator, debt-free and with a high dividend yield
33.44
880
13.3%
Stock price
Fully-diluted shares outstanding
Free float
The company has had a margin recovery, with the highest among
the industry (around 38%) on the back of the low energy
consumption and technology of its three cement plants
29,438
27,498
Market cap
Enterprise value
4,320
3 months ADTV (000´s)
Moctezuma has consistently outperformed the Mexican cement
industry’s growth rate thus increasing its market share over the past
decade
160%
CMOCTEZ
IPC
140%
120%
The high utilization rates of its overall cement production installed
capacity (6.4 million metric tons) pave the way for the
construction of the second line at Apazapan for up to 1.3 mm tons
of additional installed capacity
100%
80%
60%
40%
Dec-09
The company trades at 7.8x forward EV/EBITDA 2013E, a discount
of 23% and 19% to Grupo Cementos de Chihuahua and Cemex
respectively, which we consider unjustified
Jun-10
Jun-11
Dec-11
Jun-12
Price performance
CMOCTEZ
9.2%
18.9%
23.2%
26.1%
1 month
3 month
6 month
12 month
Risks to our valuation are a slowdown in construction activity,
delays in construction of additional capacity, higher than
expected competition and an increase in the price of petcoke
Dec-10
Dec-12
IPC
4.1%
7.5%
10.7%
22.0%
Financial overview (mm)
2010
Revenues
7,144
Revenue growth%
2012E
2013E
2014E
2015E
2016E
8,226
2011
9,116
9,391
9,668
10,068
10,925
15.2%
10.8%
3.0%
3.0%
4.1%
8.5%
4,214
EBITDA
2,284
2,850
3,423
3,543
3,644
3,806
EBITDA m argin %
32.0%
34.6%
37.5%
37.7%
37.7%
37.8%
38.6%
Net income
1,422
1,631
2,106
2,222
2,303
2,359
2,631
Net incom e m argin %
19.9%
19.8%
23.1%
23.7%
23.8%
23.4%
24.1%
1.62
1.85
2.39
2.52
2.62
2.68
2.99
EPS
EV / EBITDA
P/E
8.0x
7.8x
7.5x
7.2x
6.5x
14.0x
13.2x
12.8x
12.5x
11.2x
This report must be read together with the Disclaimer contained in the final section of the document
1
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CMOCTEZ
Company Snapshot
Public market overview
Stock price
Sales performance (MXN mm)
33.44
Dat e
1/8/13
10,000
Fully-diluted shares outstanding
880
Market cap
9,000
8,000
29,438
7,000
Debt
Minority interest
Cash
41
1,981
6,000
5,000
4,000
Enterprise value
27,498
Free Float
13.30%
3,000
2,000
1,000
-
Implied multiples
EV / EBITDA
P/E
2012E
2013E
2014E
8.0x
7.8x
7.5x
14.0x
13.2x
12.8x
2008
2009
2010
2011
2012E
Expressed in mm except the share price
One-year stock price performance
160%
150%
IPC
CMOCTEZ
European peers
Three-year stock price performance
160%
S&P 500
Latam peers
IPC
S&P 500
CMOCTEZ
Latam peers
European peers
140%
140%
130%
120%
120%
100%
110%
100%
80%
90%
60%
80%
70%
01/09/12
03/09/12
05/09/12
07/09/12
09/09/12
11/09/12
40%
1/8/10
7/8/10
1/8/11
7/8/11
1/8/12
7/8/12
1/8/13
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2
CMOCTEZ
Company Overview
Introduction
Corporación Moctezuma, founded in 1943, is Mexico’s fourth largest cement manufacturer with an installed
capacity of 6.4 mm metric tons annually. The company is vertically integrated as it is also one of the main
manufacturers of ready-mix concrete and aggregates
Moctezuma has three cement plants and 57 ready-mix concrete plants with commercial presence in 29
states in Mexico
The company is jointly controlled by Buzzi Unicem, Italy’s second largest cement manufacturer, and
Cementos Molins with an approximate 67% combined ownership
Sales performance by segment 2004-2012 (MXN mm)
Cement
9,116
Ready-mix concrete
8,226
2,090
7,143
6,684
6,783
1,537
1,664
1,553
6,486
5,524
4,690
1,823
1,777
1,371
4,165
1,221
1,202
2,963
2004
4,153
4,949
5,020
5,230
5,366
6,403
7,026
3,469
2005
2006
2007
2008
2009
2010
2011
2012E
Source: Company and Consultora 414
Sales of Portland cement, better-known as gray cement, accounted for 77.8% of 2011 consolidated sales,
while ready-mix concrete was responsible for the remaining 22.2%. Sales have grown at a nearly 10% 20042012E CAGR in spite of the 2008 financial crisis underscoring the fact that the company never stopped its
sales growth
The company has consistently outperformed the Mexican cement industry as well as the construction sector
thus showing its defensive nature and its capacity to gain market share
3
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CMOCTEZ
Company Overview
Introduction
The company has an estimated 16% market share of the Mexican cement industry in 2012, while holding 7.1%
in the ready-mix concrete segment as of 2011. The company has consistently increased its market share on
the back of improving brand recognition and an extension of its commercial efforts into new states
Cement production (mm metric tons) vs market share
60.0
CMOCTEZ
Rest of the industry
15.7%
12.7% 13.0%
50.0
10.2%
40.0
7.5%
31.1
7.8%
31.9
20.0%
CMOCTEZ market share
16.4%
13.7% 14.2%
15.0%
11.0%
8.8%
10.0%
37.9
33.2
38.8
37.1
35.1
34.7
34.5
35.4
36.4
5.0%
30.0
0.0%
20.0
28.8
29.4
30.3
31.1
33.7
33.9
32.3
30.3
29.6
29.8
30.4
10.0
0.0
-5.0%
-10.0%
2.3
2.5
2.9
3.6
4.2
4.9
4.8
4.8
4.9
5.6
6.0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E
-15.0%
Source: Company, Canacem and Consultora 414
Share of sales by segment
Cement
Ready-mix concrete
28.9%
26.0%
24.8%
23.7%
24.9%
22.9%
24.9%
22.2%
22.9%
71.1%
74.0%
75.2%
76.3%
75.1%
77.1%
75.1%
77.8%
77.1%
2004
2005
2006
2007
2008
2009
2010
2011
2012E
Source: Company and Consultora 414
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CMOCTEZ
Company Overview
Introduction
Corporación Moctezuma has three cement manufacturing plants located in Morelos, San Luis Potosí and
Veracruz. All of them are relatively new, Tepetzingo, Morelos plant being the first to be opened back in 1997
while the Apazapan, Veracruz plant was the last to be opened (end of 2010)
Cement manufacturing plants in Mexico
Cerritos
Apazapan
Cemex
Holcim Apasco
Cementos y Concretos Nacionales (Cruz Azul)
Corporación Moctezuma
Grupo Cementos de Chihuahua (GCC)
Tepetzingo
Cementos Fortaleza/Lafarge Cementos
Source: Canacem
All of Moctezuma’s plants are among the most energy-efficient plants in the world. As a rule of thumb energy
accounts for a third of cement production costs (ex depreciation) explaining the higher margins relative to
the rest of its peers in the Mexican cement industry
Dry-process is used in all of Moctezuma plants enabling a higher efficiency in the cement manufacturing
process due to the shorter time it takes to produce clinker in the kiln
Due to the relatively short time that the company has been in operation, maintenance is quite low hovering
around USD 10 mm annually
5
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CMOCTEZ
Company Overview
Features
Growing easy
The company has a wide distribution network throughout the country
The Tepetzingo plant in Morelos covers the central region of the country, which consumes about 50% of
cement demand in Mexico, whereas Cerritos, located in San Luis Potosi allowed the entrance into the
northern part of the country, traditionally served by Cemex. The beginning of operations of the Apazapan
Plant has jump- started further expansion into more states in the southeastern region while reducing logistic
costs, as these states were previously served by the Tepetzingo, Morelos plant
Much of cement sales in Mexico are made through distributors who sell bagged cement in 50 kg format. This
is explained by the importance of the DIY (Do-it-yourself) or self-construction market, which is responsible for
most of sales. The rest is sold in bulk cement to industrial and large construction companies and ready-mix
concrete manufacturers as well
Petcoke-dependence: The path to profitability
Unlike its other Mexican peers, Moctezuma uses petcoke as its main fuel source while others use a mix of
coal, natural gas and petcoke in their kilns
Moctezuma does not use alternative fuels (i.e. tires) in its kilns. The reasons for this is that conversion process
would not allow uninterrupted production
Petcoke is slightly above 20% of the cost of cement production. The company arranges long-term contracts
with US petcoke suppliers on a yearly basis securing the supply while locking the price (paid in USD)
throughout the year
In 2011 the price of petcoke, an oil by-product, spiked pushing margins down. However, in 2012 petcoke
price retreated allowing a significant improvement in profitability
6
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CMOCTEZ
Company Overview
Features
Sustainable growth
Corporación Moctezuma has a conservative profile across production decisions, management, financial
structure and when it comes to making investment decisions
Unlike the vast majority of companies within the world cement industry, Moctezuma has no debt outstanding
The company funds its investments to continue its rapid organic growth through resources provided by its
operating cash flow
Its main appeal: Let’s talk about dividends
The company does not have an established policy regarding the distribution of dividends, therefore
dividend yield has varied from year to year, but it has paid dividends since every year since 2000
The company has repeatedly paid “extraordinary” dividends ahead of a reduction in capital investments
needed for the company’s organic growth and due to the hoarding of cash
Even when the company has not paid “extraordinary” dividends, the dividend yield has only fallen once
below 2%. Moctezuma meets the main characteristics that distinguish a defensive company despite being
part of a highly cyclical industry by generating significant free cash flow and having a high (above average)
dividend yield
Historical dividend yield1
14.0%
12.0%
13.5%
11.8%
11.6%
10.0%
8.0%
6.7%
6.0%
5.0%
4.0%
4.6%
3.4%
2.9%
2.7%
2.8%
2.4%
2.2%
1.6%
2.0%
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
1Based
on year-end stock price
Source: Company and Sibolsa
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CMOCTEZ
Mexican Cement Industry
Overview
A very exclusive club
The Mexican cement industry is one of the most developed, modern and efficient in the world due to high
quality standards and environmental care practices. The cement industry in Mexico is characterized by the
modernness and efficiency of the 35 (including Cementos Fortaleza´s new plant) cements plants in the
country. Nearly 100% of cement plants in Mexico use the dry-process which improves plant efficiency
Cement production installed capacity in Mexico
Company
Cemex
Holcim Apasco
Cooperativa La Cruz Azul
Corporación Moctezuma
Grupo Cementos de Chihuahua (GCC)
Cementos Fortaleza/ Cementos Lafarge
Total
Installed Capacity
(mm metric tons/
year)
29.3
12.2
8.6
6.4
2.3
1.8
60.6
There are currently six participants,
including the three dominant world
cement players which are Lafarge,
Holcim Apasco and Cemex and three
mostly national producers Cooperativa
Cruz Azul, Corporación Moctezuma and
Grupo Cementos de Chihuahua. At the
end of 2012 another player joined the
exclusive club, Cementos Fortaleza
(Elementia) that at the beginning of the
year announced a JV with Cementos
Lafarge expected to be completed in
2H2013 and is pending approval from
regulatory authorities. This will increase
competition in the industry
Source: Companies’ information
Mexico’s 2013 cement production installed capacity reached approximately 60 mm metric tons per year
after the entry of Elementia to the market through its subsidiary Cementos Fortaleza
Current cement production suggests that there is quite a lot of idle capacity and that some of the most
important players (Cemex and Holcim Apasco) are running around 60% capacity utilization
The Mexican cement industry has just begun to recover and we estimate 2.8% growth in 2012 in order to
reach 36.4 mm metric tons of cement. The industry is still far from its 2007 peak when it produced 38.8 mm
metric tons. However, we expect that the production and consumption of cement will continue its recovery
by getting to its peak by 2015, two years earlier than anticipated by Canacem (National Chamber of
cement)
In our view, the difference will be made by the continuity of the 2007-2012 NIP (National Infrastructure Plan),
when the government proposes the 2013-2018 NIP achieving investments levels above 5% of GDP. We
believe this plan will be based on the proposal submitted by the CMIC (Mexican Chamber of the
Construction Industry)
Moctezuma is running above 90% capacity utilization, and in our base case of an ongoing significant
recovery in construction activity in Mexico Cemex and Holcim Apasco are better positioned to take
advantage of it. In the specific case of Cemex, which has 15 cement manufacturing plants in Mexico, of
which two are shut down, it could put them in operation within a relatively short timespan and on top of that
there is a construction of additional capacity in the Tepeaca, Puebla plant
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CMOCTEZ
Mexican Cement Industry
Overview
A cyclical industry with high elasticity
Construction performance is tied closely to that of the overall economy representing 6.5% of GDP on
average over the past five years
The construction industry tends to be more sensitive to movements in the overall economy, that is, when the
overall economy grows the construction industry sees higher growth and conversely
Building is the largest component of construction GDP accounting for approximately 50%
Construction GDP vs GDP ( % Ch YoY)
Construction Real GDP
Real GDP
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-9%
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
-10%
Source: INEGI
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CMOCTEZ
Mexican Cement Industry
Overview
The weight of self-construction
The sale of cement in Mexico, unlike other countries such as the U.S., is made through retail distributors in 50
kg bags format representing nearly two thirds (59% in 2011) of the cement demand in the country. The
industrial and commercial sector, represented by ready-mix concrete manufacturers and large construction
companies make the balance which is sold in bulk
It is estimated that the self-construction market represents about 30% of total cement demand and has
become very relevant following the slowdown in the construction industry in Mexico, primarily caused by the
funding crisis for homebuilders in the country in 2008
As the self-construction is a significant component of cement demand, it is linked in a very significant way to
the remittances received from the U.S. migrant workers which are an important source of resources for this
segment
Remittances LTM performance (USD mm) vs % Ch YoY
27,000
25%
20%
26,000
15%
10%
25,000
5%
0%
USD mm
24,000
-5%
-10%
23,000
-15%
-20%
22,000
-25%
-30%
21,000
-35%
-40%
20,000
-45%
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
-50%
Jan-06
19,000
Source: Banxico
In the graph above we can see how LTM remittances begin to show a deceleration even posting flat growth
which is very important in the dynamic of the self-construction segment in the country. Remittances and
consumer confidence are important gauges of the performance of the self-construction segment
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CMOCTEZ
Mexican Cement Industry
Overview
Retail distribution channels and the importance of brand recognition
The nature of the product distribution through third parties underscores the importance of the channels
through which cement is distributed
Distribution is a very important factor, since cement is a product that cannot differ significantly among
suppliers. Therefore the need to create consumer loyalty and a wide distribution network is paramount to
the success of a cement player
While there are well-positioned brands such as Cruz Azul Cement that has become the third most important
cement player in Mexico by gaining market share through brand recognition, the distribution is a critical
issue given the relatively high cost of transporting cement
Having said that, Cemex and Holcim Apasco have led major efforts to reach the end retail consumer:
―
Cemex has its own construction materials store chain, Construrama, through which it has nationwide
presence with more than 2,200 stores across the country
―
Holcim Apasco recently launched the sale of bagged ready-mix concrete through one of the largest
supermarket chains in Mexico to serve the self-construction segment in hard-to-reach areas
Costs
The cost of producing cement after depreciation is about half the selling price. That is why it is important to
review the overall cost structure:
Traditional cost structure (ex depreciation)
Freight
The cost of cement production (before
depreciation) typically consists of freight, raw
material and others and energy divided in
equal parts. This cost structure can vary
according to the particular conditions in
certain countries and companies
The cost of transporting cement (freight) in
Mexico is particularly expensive and complex
given the geography of the country. This is
why plants are strategically located near
quarries where raw materials are extracted
and close to high cement consumption areas
Raw materials
and others
Energy
(electricity and
fuel)
The low relative value of cement makes transportation very expensive, thus representing an important share
of the cost. Cement companies have tried to increase the use of rail as a means of transportation.
Nevertheless the lack of available rail infrastructure in the country has curbed potential savings
11
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CMOCTEZ
Mexican Cement Industry
Costs
Rising energy costs are responsible for the contraction in margins
Energy is the most volatile input in the cement costs mix and has pressed the high margins in the Mexican
cement industry compared to other regions. The cost of energy is broken down into electricity and fuel
Fuel prices such as those of coal, natural gas, oil and its by-products have increased considerably in recent
years. In response, companies have accelerated the use of alternative fuels to reduce exposure to price
fluctuations in their main inputs
Cemex has reported that approximately 25% of the fuel used comes from alternatives sources
Cement consumption in Mexico in absolute terms and per capita has barely grown and the latter is far
below other emerging and developed countries hovering around 300 kg per capita annually. According to
Canacem It is believed that Mexico could reach 400 kg per capita
Cement consumption per capita (kg/year)
400
350
300
250
200
150
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Canacem
Pricing
Cement price is measured in tons and varies depending on the region and demand influenced by
seasonality. In Mexico, prices have advanced considerably since cement producers have tried to pass on to
the consumer some of the abovementioned increased in input costs, although partially which as we have
mentioned is reflected in the decline in margins. It is difficult to assess the price the distributor pays to the
producer. However, we know that cement prices hover around USD 100 per metric ton, which puts them
above U.S. prices
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CMOCTEZ
Challenges and Expectations
After outperforming the industry, a period of consolidation follows
We estimate that the company will end the year with 5.95 mm metric tons of cement sales, which means
that the company is running at a 93% capacity utilization
Ever since the opening of the Tepetzingo, Morelos plant (1997) the company has operated at high utilization
rates due to a conservative approach in making investment decisions
An 85% capacity utilization level is indicative for additional installed capacity construction due to the time it
takes to have the plant up and running (2 years on average)
Cement production vs capacity utilization rate
100%
8.0
97%
93% 93%
93%
95% 94% 96%
89%
95%
93% 94%
Opening of
Cerritos plant
second line
Expected
opening of
Apazapan plant
second line
mm metric tons
6.0
Opening of
Apazapan,
Veracruz plant
94%
90%
87%
7.0
100%
97%
86%
5.0
80%
60%
4.0
40%
3.0
2.0
20%
1.0
0.0
0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E 2013E 2014E 2015E 2016E 2017E 2018E
Source: Canacem, Company and Consultora 414
The company has operated above 90% of installed capacity utilization on average over the last decade. The
years in which a read below 90% can be observed are those in which the company had just added
capacity. However, it is important to emphasize the ability to run at high utilization in the new facilities in the
first year of operations as was the case for the Apazapan plant
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CMOCTEZ
Challenges and Expectations
Adding capacity in order to maintain market share
As we have already mentioned the company is running at 93% utilization rate and has no additional
capacity under construction. The company risks slowing volume growth if it does not achieve a decision on
whether to go ahead with the construction of more installed capacity in 2013
We believe the company has about half a million metric tons of additional capacity for producing cement
before reaching full capacity. In this scenario the company will have to make a decision in the coming
months about opening the second line at the Apazapan plant
It is worth mentioning that the construction of a new plant or a new production line with 1.2 to 1.3 mm
metric tons of capacity takes approximately two years and an investment of about USD 300 mm
In our opinion, Moctezuma will choose to start the construction of the second line at the end of 2013 in order
to begin operations in early 2016. Therefore we are incorporating this into our model
However, the pace of growth in cement sales shown by Moctezuma in the last ten years at a 10% CAGR will
slow down due to limited available capacity on top of the entry of a new competitor to the Mexican
cement market
In our opinion, when the new installed capacity becomes operational in 2016, at least 70% capacity
utilization rate of this new facility will be reached based on past data, allowing faster growth going forward
The new player: Cementos Fortaleza
Cementos Fortaleza, a subsidiary of Elementia, became the seventh player in the Mexican cement industry
when its one million metric tons of installed capacity plant opened in November in the state of Hidalgo
Cementos Fortaleza will focus in the self-construction segment and will have the fifth plant in the state of
Hidalgo. The company initially stated that cement production would be mostly for Elementia’s vertical
integration purpose. In our opinion the company has an incentive to be aggressive in order to gain market
share
Cementos Fortaleza and Cementos Lafarge (Lafarge Mexico) announced earlier this year a joint venture
between the two companies thus combining Cementos Fortaleza´s new cement plant and two Lafarge
plants also located in the state of Hidalgo reaching 1.8 mm metric tons of installed capacity. Elementia will
hold 53% of the joint venture whereas Lafarge will have 47%
As per our calculations the combined company will have between 5% to 6% share of the Mexican cement
market. The three plants will serve the central region (50% of Mexico’s cement demand) which is also served
by Moctezuma’s Tepetzingo, Morelos plant
In our view the spillover effects Cementos Fortaleza will have in Moctezuma are difficult to assess, yet we
estimate them to translate into 0.5 mm tons of cement volumes taken away in our base case. Moreover, Mr.
Antonio Taracena who used to be CEO of Moctezuma for 16 years will be taking over the CEO role in
Cementos Fortaleza
14
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CMOCTEZ
Challenges and Expectations
2013 to be a year of consolidation
The company has shown a rapid revenue growth of 10% CAGR over the last 10 years reaching 93% capacity
utilization notwithstanding the fact that the company just added capacity at the end of 2010. However, we
believe that Moctezuma wil begin a phase of consolidation resulting in low growth rates in 2013. In our
model we estimate a 3.3% 2012-2018 CAGR for cement volume growth reaching 7.2 mm metric tons by
2018 as long as the construction of Apazapan’s second line of production goes ahead in late 2013
The slowdown in Moctezuma’s growth is due to several factors:
―
The aforementioned entrance of Cementos Fortaleza in combination with Cementos Lafarge in 2013
which will compete with Moctezuma in some of the most dynamic and important states for Moctezuma
in the central region of the country
―
The lack of additional installed capacity that the company currently has that in our base case will
expand from 6.4 to 7.7 mm metric tons by the beginning of 2016
―
Low utilization rates (close to 60%) at which Cemex and Holcim Apasco are running leaves them well
positioned to benefit from a surge in cement consumption in the coming years
We expect moderate growth of 1.3% in cement volumes and stable prices in 2013 on the back of
competitive pricing by Cementos Fortaleza trying to gain market share. On the other hand, ready-mix
concrete volumes will grow 3.2% in 2013 decelerating from the 10% volume growth we believe the company
had in 2012
Margin recovery confirmed and stabilizing going forward
50.0%
Sales
EBITDA margin
Net margin
10,000
45.0%
40.0%
8,000
35.0%
30.0%
6,000
25.0%
20.0%
4,000
15.0%
10.0%
2,000
5.0%
-
0.0%
2007
2008
2009
2010
2011
2012E
2013E
2014E
2015E
Source: Company and Consultora 414
15
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
Challenges and Expectations
Margin recovery confirmed in 2013
The fuel used by Moctezuma is petcoke and represents two thirds of energy costs. We expect that in 2013
Moctezuma will lock slightly better prices for its petcoke supply contracts, which in turn will help to confirm
the improvement in margins seen in 2012 compared to 2011 lower margins
Petcoke purchase contracts set the price throughout the year and are determined in USD, while Moctezuma
revenues are MXN denominated (implying a risk). However, MXN appreciation against the USD that took
place recently will probably be a factor for better prices in MXN compared to those obtained in 2012
Operating leverage in the cement industry is linked to a high capacity utilization rate in the cement
manufacturing plants; therefore we do not see much upside in EBITDA margin in Moctezuma triggered by
this. Moctezuma´s cement manufacturing plants are equipped with top of the line technology and a very
low energy consumption when compared to international standards
Even though 2013 will be a key year for Moctezuma to confirm the improvement in profitability, we do not
see much headroom for further EBITDA expansion and in our view margins will stabilize at levels of 38% going
forward
16
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
Challenges and Expectations
Petcoke 4 to 5.5% Sulfur 50 HGI (USD/ton)
Cost structure
140
130
120
110
100
90
80
70
60
50
40
Freight
30
Raw materials and others
Petcoke
Electricity
20
10
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
0
Consolidation in Mexico cement industry: We see Moctezuma more as a prey than as a predator
Higher margins in Mexico and the high barriers to entry, high investment needed in infrastructure and finally
the entry of new participants with deep pockets open the door for further consolidation in Mexico cement
industry (among the smaller players)
Despite Moctezuma’s flexibility to take on debt to fund an acquisition given its debt-free balance sheet, we
think of Moctezuma more as a prey than a predator. The reason for this is the conservative profile with
which the company has been managed regarding its investment decisions as well as the organic growth
strategy
It is important to bear in mind that the majority shareholders, Cementos Molins and Buzzi Unicem, see
Moctezuma as one of its most valuable assets. However, we do not rule out the possibility of a sale of all or
part of its stakes in Moctezuma fueled by the ongoing recession in the Eurozone from where the majority of
sales of both come from (8% and 28% of consolidated sales of Buzzi Unicem and Cementos Molins in 2011
respectively came from Moctezuma)
The announcement of Cementos Lafarge and Cementos Fortaleza JV indicates that growth opportunities
exist in the industry given the infrastructure needs in the country. The combined company seeks to position its
brand and gain market share especially in the self-construction segment
We believe Elementia could be the most interested in acquiring brownfield cement assets. However, the
implied price per million tons of installed capacity of cement at which Moctezuma trades according to our
back of the envelope calculation are well above the cost of building a greenfield project. In our opinion the
JV announcement of Elementia´s cement assets and Cementos Lafarge rules out any further consolidation
activity at least in the short term. That being said, we do not rule out that Moctezuma has a takeover value,
but not under existing conditions
17
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
Challenges and Expectations
Significant free cash flow generation in 2013
After three years of heavy investment to increase installed capacity, we believe 2013 will be a year of low
investment and consolidation of existing ones. Hence we expect significant free cash flow generation in
2013
The company recently paid a dividend in December of MXN 2.00 per share in anticipation of lower capital
expenditures in 2013 coupled with an important cash position of around MXN 2,000 mm as of the third
quarter. The full year dividend was MXN 3.70 (11.9% dividend yield). A 200% dividend payout ratio (2011
controlling net income) is clearly an extraordinary dividend which is not sustainable going forward
Which payout ratio could we expect going forward?
Moctezuma has limited financial needs in order to invest in capital expenditures and working capital,
whereas cash flow from operations is significant and steady, allowing the company to hoard cash in excess
of its needs
Even though the company has not disclosed a level of cash with which it feels comfortable, we would
expect a 70% dividend payout ratio ( based on previous controlling net income) even considering
investments for Apazapan’s second line. We do not expect extraordinary dividends as those seen in 2012
until 2017 where we are forecasting a 125% dividend payout ratio or MXN 3.74 per share for that year
As for 2013 we are calculating a MXN 1.65 full year dividend to be paid in the fourth quarter which implies a
4.9% dividend yield based on our YE2013 target price of MXN 36.00
Selling cement is profitable in Mexico
30%
Dividend yield
FCF yield
ROE
2015E
2016E
ROA
25%
20%
15%
10%
5%
0%
2012E
2013E
2014E
2017E
2018E
Source: Consultora 414
18
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
Investment Thesis
Merits and risks
Merits
Above-industry margins
High capacity utilization
rate and second line at
Apazapan plant
High dividend yield and
significant FCF
generation
Due to energy efficiency of its three cement manufacturing plants
and a high capacity utilization rate the company has the highest
margins of the cement industry in Mexico with an EBITDA margin of
around 38%
We believe there is potential for the company to confirm these
margins in 2013 and remain at that level going forward due to a
stabilization at lower levels in petcoke price (USD denominated) and a
more favorable exchange rate (MXN/USD) compared to last year’s
Unlike other industry players in Mexico, Moctezuma has run at a high
capacity utilization (93%) leading to higher operating leverage
Due to an eventual recovery in the construction sector activity in
Mexico and little idle capacity available, the company is urged to
decide throughout 2013 whether or not to build the second line in
Apazapan plant adding 1.3 mm metric tons to reach 7.7 by 2016
according to our forecast
The company has no debt which gives it a defensive nature and
operational flexibility in case of an generalized downturn in
construction activity in Mexico
Moctezuma expects to reduce capital expenditures in 2013 thereby
allowing higher free cash flow generation which leads us to expect a
MXN 1.65 full year dividend implying a 4.9% dividend yield
19
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
Investment Thesis
Mertis and risks
Risks
The new player,
Cementos Fortaleza/
Cementos Lafarge is a
threat to Moctezuma
High fuel prices
(petcoke)
Delay in the
construction of
additional installed
capacity
Cementos Fortaleza, a subsidiary of Elementia which is controlled by
Antonio del Valle (Mexichem) and Carlos Slim started operations in
november with a one million metric tons of installed capacity in the state
of Hidalgo
At the beginning of the year a JV between Cementos Fortaleza and
Cementos Lafarge was announced reaching 1.8 mm metric tons of
annual installed capacity with three cement plants in the state of Hidalgo
Cementos Fortaleza in our view will attempt to gain market share and put
downward pressure on prices intensifying competition in the central
region, a key area for Moctezuma and in the segment of self-construction
We expect a deceleration in the growth of the company on the back of
some sales taken away by Cementos Fortaleza that we calculate in the
neighborhood of half million metric tons in our base scenario. Moreover
Mr. Antonio Taracena, CEO of Cementos Fortaleza, occupied the same
position for 16 years in Moctezuma
An increase in the price of petcoke, the main input of Moctezuma for
cement production, could pressure margins as in 2011 when the price
peaked and margins bottomed
Elimination of energy subsidies granted by the state-owned CFE (Federal
Electricity Commission) to the private sector by the federal government
could pressure margins as the company depends on CFE for the supply of
electricity
A delay in the decision to increase installed capacity by building the
second line of Apazapan plant is a downside risk to our estimates, as the
company is currently operating at a high utilization rate
In our estimates we expect the decision to be made by mid-2013 in order
to start the construction in late 2013 or early 2014 so that there is new
capacity available in early 2016 to reach 7.7 mm metric tons
20
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
Summary Financials
Historical and projected income statement (MXN mm)
Income statement
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
Net sales
Costs of goods sols
Gross profit
7,144
4,572
2,572
8,226
5,468
2,759
9,116
5,691
3,425
9,391
5,817
3,573
9,668
6,004
3,664
10,068
6,293
3,776
10,925
6,773
4,151
11,633
7,189
4,444
12,401
7,651
4,749
Gross margin %
36.0%
33.5%
37.6%
38.1%
37.9%
37.5%
38.0%
38.2%
38.3%
SG&A
EBIT
402
2,169
470
2,288
483
2,942
490
3,083
497
3,167
508
3,268
531
3,620
550
3,894
568
4,181
EBIT margin %
30.4%
27.8%
32.3%
32.8%
32.8%
32.5%
33.1%
33.5%
33.7%
Depreciation & amortization
EBITDA
115
2,284
562
2,850
481
3,423
460
3,543
477
3,644
538
3,806
594
4,214
608
4,502
594
4,775
EBITDA margin %
32.0%
34.6%
37.5%
37.7%
37.7%
37.8%
38.6%
38.7%
38.5%
(10)
(10)
(11)
60
(11)
10
(5)
98
(5)
84
(5)
62
(5)
93
(5)
49
(5)
59
Other income (expenses)
Comprehensive financing cost
EBT
Taxes
Net income
2,150
725
1,425
2,337
703
1,634
2,941
832
2,109
3,176
953
2,223
3,245
941
2,304
3,324
964
2,360
3,707
1,075
2,632
3,937
1,142
2,795
4,234
1,228
3,006
Minority interest
Controlling net income
2
1,422
3
1,631
3
2,106
1
2,222
1
2,303
1
2,359
1
2,631
1
2,794
1
3,005
Net margin %
19.9%
19.8%
23.1%
23.7%
23.8%
23.4%
24.1%
24.0%
24.2%
1.62
1.85
2.39
2.52
2.62
2.68
2.99
3.17
3.41
EPS
21
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
Summary Financials
Historical and projected balance sheet (MXN mm)
Balance sheet
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
Assets
Cash & cash equivalents
Accounts receivable
Inventory
Other short-term assets
Short-term assets
1,518
1,731
708
90
4,047
1,760
1,768
785
196
4,508
570
1,961
811
209
3,551
1,437
2,058
813
209
4,517
1,195
2,146
855
209
4,405
1,022
2,248
896
209
4,376
1,559
2,454
965
209
5,188
1,078
2,614
1,024
209
4,924
2,084
2,786
1,090
209
6,169
LT accounts receivables
Net fixed assets and intangibles
Other long-term assets
Long-term assets
10
7,098
166
7,274
7
7,212
138
7,357
7
7,020
138
7,165
7
6,816
138
6,962
7
7,689
138
7,834
7
8,485
138
8,630
7
8,684
138
8,829
7
8,480
138
8,625
7
8,315
138
8,460
11,321
11,865
10,716
11,479
12,239
13,006
14,017
13,550
14,629
Accounts payable
ST bank debt
Taxes payable
Other short-term liabilities
Short-term liabilities
331
3
222
305
861
360
6
284
261
911
374
2
406
192
974
367
2
406
192
966
378
2
406
192
978
397
2
406
192
996
427
2
406
192
1,026
453
2
406
192
1,053
482
2
406
192
1,082
LT debt
Other long-term liabilities
Deferred taxes
Long-term liabilities
7
26
1,197
1,230
15
24
1,192
1,232
19
16
1,133
1,168
19
16
1,133
1,168
19
16
1,133
1,168
19
16
1,133
1,168
19
16
1,133
1,168
19
16
1,133
1,168
19
16
1,133
1,168
Total liabilities
2,091
2,143
2,142
2,134
2,146
2,164
2,194
2,221
2,250
Shareholder´s equity
Retained earnings
Minority interest
754
8,438
38
754
8,930
38
754
7,779
41
754
8,548
43
754
9,296
44
754
10,043
45
754
11,023
46
754
10,528
47
754
11,577
48
Total equity
9,230
9,722
8,574
9,345
10,093
10,842
11,822
11,329
12,380
11,321
11,865
10,716
11,479
12,239
13,006
14,017
13,550
14,629
Total assets
Liabilities
Total liabilities + equity
22
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
Summary Financials
Projected cash flow (MXN mm)
Cash flow
2012E
Net income
Non-cash items
Changes in net working capital
Total cash from operations
2,106
478
(216)
2,369
2013E
2,222
461
(107)
2,575
2014E
2,303
478
(118)
2015E
2,359
539
(126)
2,663
2,773
2016E
2,631
595
(244)
2,982
2017E
2,794
609
(192)
3,211
2018E
3,005
595
(209)
3,391
Capex
Others
(281)
1
(256)
-
(1,350)
-
(1,334)
-
(793)
-
(404)
-
(428)
-
Total cash from investment
(280)
(256)
(1,350)
(1,334)
(793)
(404)
(428)
Change in debt
Equity contributions
Dividends
Others
(3,257)
(21)
(1,453)
-
(1,555)
-
(1,612)
-
(1,651)
-
(3,289)
-
(1,956)
-
Total cash from financing
(3,278)
(1,453)
(1,555)
(1,612)
(1,651)
(3,289)
(1,956)
Net change in cash
(1,189)
(242)
(173)
Initial cash
Ending cash
1,760
570
867
570
1,437
1,437
1,195
1,195
1,022
537
1,022
1,559
(482)
1,559
1,078
1,007
1,078
2,084
23
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
Summary Financials
Selected historical and forecasted financial ratios
2010
2011
2012E
2013E
2014E
Profitability
Gross margin
36.0%
33.5%
37.6%
38.1%
37.9%
EBIT margin
30.4%
27.8%
32.3%
32.8%
32.8%
EBITDA margin
32.0%
34.6%
37.5%
37.7%
37.7%
Net margin
19.9%
19.8%
23.1%
23.7%
23.8%
DPS (MXN)
0.50
1.30
3.70
1.65
1.77
Dividend yield
1.5%
3.9%
11.1%
4.9%
5.3%
ROE
17.2%
23.0%
24.8%
23.7%
ROA
14.1%
18.7%
20.0%
19.4%
18.0x
9.6x
14.0x
8.0x
13.2x
7.8x
12.8x
7.5x
Valuation
P/E
EV/EBITDA
20.7x
12.0x
24
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
Valuation
Discounted cash flow (DCF)
We are initiating coverage on Corporación Moctezuma with a 2013 year-end target price of
MXN 36.00 implying a pre-dividend upside of 7.7%
We value Corporación Moctezuma with a discounted cash flows method (DCF) of five years up to 2018, with
an 11.2% WACC and a 3.0% perpetuity growth rate. Corporación Moctezuma trades at a 13.2x and 7.8x P/E
2013E and EV/EBITDA 2013E, respectively
The company trades at a 23% and 19% EV/EBITDA 2013E discount to Grupo Cementos Chihuahua and
Cemex, respectively which we consider unjustified given Moctezuma’s debt-free balance sheet, higher
margins and higher dividend yield
Discounted cash flows
2012E
2013E
2014E
2015E
2016E
2017E
2018E
EBIT
Taxes
Depreciation and amortization
Changes in working capital
Capital expenditures
2,942
(832)
481
(216)
(281)
3,083
(953)
460
(107)
(256)
3,167
(941)
477
(118)
(1,350)
3,268
(964)
538
(126)
(1,334)
3,620
(1,075)
594
(244)
(793)
3,894
(1,142)
608
(192)
(404)
4,181
(1,228)
594
(209)
(428)
EBITDA
3,423
3,543
3,644
3,806
4,214
4,502
4,775
Levered cash flows
2,095
2,227
1,235
1,383
2,101
2,764
2,909
1,171
1,179
1,611
1,905
1,803
22,630
Discounted cash flows
Terminal value - perpetuity growth
Enterprise value
30,299
Total debt
Cash
Net debt
1,437
(1,437)
Minority Int erest
Múltiplo implícito de EBITDA 2013E
Múltiplo implícito de EBITDA 2014E
Múltiplo implícito de UPA 2014E
8.6x
8.3x
13.8x
43
Market cap
Shares outstanding
31,694
880
Implied share price
36.00
Discount rate
Perpetuity
9.7%
10.2%
10.7%
11.2%
11.7%
12.2%
12.7%
1.50%
37.56
35.38
33.45
31.71
30.15
28.73
27.45
2.00%
39.45
37.03
34.89
32.99
31.28
29.74
28.35
Perpetuity growth rate
2.50%
3.00%
41.60
44.07
38.89
41.00
36.51
38.34
34.41
36.00
32.53
33.93
30.86
32.09
29.35
30.44
3.50%
46.94
43.43
40.42
37.80
35.50
33.47
31.66
4.00%
50.31
46.26
42.81
39.85
37.27
35.01
33.01
4.50%
54.32
49.58
45.59
42.21
39.29
36.76
34.53
25
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
Comparable Trading Companies
Stock price
(Local currency)
Market cap (Local
Currency MM)
Company
P/E
Enterprise value
(Local currency
MM)
2012E
2013E
EV / EBITDA
2014E
2012E
2013E
2014E
LatAm Peers
Corporación Moctezuma
33.44
29,438
27,498
14.0x
13.2x
12.8x
8.0x
7.8x
7.5x
Cemex
10.43
145,180
363,131
N/A
N/A
30.9x
10.9x
9.6x
8.5x
Grupo Cementos Chihuahua
42.90
14,266
20,006
36.4x
25.2x
16.9x
11.6x
10.1x
8.0x
Cementos Pacasmayo
7.19
3,821
3,483
25.2x
19.5x
17.8x
12.4x
10.2x
9.1x
Unión Andina Cementos
3.60
5,927
7,375
22.8x
20.0x
18.2x
11.0x
9.8x
8.9x
10,900
12,553,228
12,697,057
37.7x
44.9x
29.6x
15.5x
13.5x
11.5x
25.2x
20.0x
18.0x
11.3x
9.9x
8.7x
Cementos Argos
Median
European peers
Holcim
68.50
22,405
36,945
20.2x
15.6x
12.0x
8.7x
7.8x
6.7x
Lafarge
48.54
13,943
28,323
20.0x
13.4x
10.4x
8.3x
7.6x
6.9x
Heidelberg Cement
46.70
8,755
18,221
16.3x
12.0x
9.1x
1.0x
6.9x
6.2x
4.72
836
3,036
N/A
66.2x
13.2x
4.7x
4.3x
3.8x
10.69
1,768
3,143
34.9x
20.5x
13.9x
6.8x
6.1x
5.4x
8,755
18,221
20.1x
15.6x
12.0x
6.8x
6.9x
6.2x
Italcementi
Buzzi Unicem
Median
26
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
Appendix
Management and ownership structure
Ownership structure
Management
Name
Position
Pedro Carranza Andressen
CEO
Luiz Carlos Ortiz de Camargo
CFO
Mario Festuccia
Chief Technology
Antonio Cosío
Ariño
10.0%¹
Cementos
Molins
33.3%
Carlos Slim &
Family
10.0%¹
Officer
Oreste Amoretti
Tepetzingo Plant
Director
Miguel Guillermo Barojas
Buzzi Unicem
33.3%
Apazapan Plant
Free Float
13.3%
Director
Octavio Adolfo Senties
Cerritos Plant
Director
1Estimated
Ownership
27
Consultora 414, S.A. de C.V. ● +5255 5292 3322 ● [email protected] ● www.414c.com
CMOCTEZ
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