Cemargos Emerges As An Outperformer To Watch
BMI View : In line with our positive outlook for the Colombian construction segment, we highlight the country's largest cement and concrete producer Cementos Argos (Cemargos) as a key beneficiary well placed to capitalise on this trend.
Cemargos is without a doubt a big player in the cement and concrete market with a domestic market share of almost 50%. The company is also exposed to other strong markets such as Panama where we have a positive view, supporting a broader positive outlook for the company. Cemargos is the third largest concrete producer in the US with a production capacity of 14.06mn cubic meters per year and the fifth largest cement producer in Latin America. Its wide geographical scope and substantial number of manufacturing plants facilitate economies of scale and the logistics for the commercialisation of the product.
Opportunistic Technicals, Solid Financials
Strong fundamentals, an attractive technical picture, and potential for future growth, in particular in its domestic market, has underlined our Country Risk team's decision to initiate a bullish position on Cemargos share price in our Americas Asset Class Strategy Table on July 2. A favourable technical picture underpinned this decision, following a break through multi-month resistance at COP7,950. Furthermore, momentum indicators point towards significant upside potential.
|Cemargos Share Price, COP|
Whilst the technicals dictated the timing of our bullish position, the view is grounded in solid fundamentals (see 'Bullish Colombian Materials Stocks', 02 Jul). In 2012, the company reported a strong set of financial results with revenues of US$2.4bn compared to US$2bn in 2011. In addition, net income reached US$222mn in 2012 up from US$206 in 2011. Although EBITDA margin decreased to 18.1% in 2012 from 21.12% in 2011 we estimate this indicator will improve again in 2013. This healthy performance is complemented by a strong market cap of US$6.04bn - around half that of Mexico's Cemex US$12.3bn.
Although net debt has been increasing over the past few years - particularly in 2011 when it increased by almost 30% - it remains at a moderate level. Cemargos debt in 2012 was US$1.6bn and more importantly, the company is being proactive in fulfilling its financial commitments. In May 2013, Cemargos received a US$61mn loan from a local bank in order to renew part of its existing debt. In addition, Cemargos secured US$833mn with a share issuance in June 2013 that will be used to cover some of the company's financial obligations and to fund the expansion of operations at home and abroad. Apart from organic growth, Cemargos' expansion plans focus in Central America although opportunities are also being considered in North America and the Caribbean. In 2013, the company expects to grow between 4% and 6% in revenues.
Concrete Gains From Domestic Momentum
At the domestic level, Cemargos is in a strong position as we maintain a favourable stance towards Colombia's infrastructure sector. While a series of government delays posed downside risks through H113, there are signs that several construction projects are moving forward (see 'Tangible Progress On Transport Concessions', 03 Jun). Moreover, in our most recent Colombia Equity Strategy (see 'Monitoring Post-Sell-Off Opportunities', 14 Jun) we highlighted that we saw strong bounce potential for Cemargos as positive infrastructure-related data starts to feed through, which has been the case.
The US$2.7bn fiscal stimulus plan (PIPE) announced in April 2013 which is expected to mainly support the infrastructure sector, has further reinforced our optimism for Cemargos. First, it will provide US$390mn to accelerate the completion of ongoing infrastructure projects, mainly roads, which should offset some of the delays seen in recent months. Second, it will finance loan subsidies for middle-income housing, effectively reducing their interest rates from 12.5% to 7.0%. While some of the PIPE funds, particularly those allocated for larger infrastructure projects, will not flow until 2014, we expect some of the effects to be felt this year, particularly in housing construction and road projects that are already under construction but behind schedule. Regardless, the funds support our medium positive outlook for growth in Colombia's construction industry.
|Construction Industry Value (COPbn) And Real Growth % y-o-y|
Internationally Well Placed
Similarly, the company holds a strong position in the US market as the construction sector has started to recover. Driven by the residential segment, real construction industry value growth for 2012 reached 3.2%, after a seven year recession. We believe that Cemargos' substantial exposure to the US market is a positive for the company's performance, especially over 2013 and 2014 while the sector experiences moderate growth. Over the longer term, construction growth will very much depend on political and fiscal factors, and the ability to entice greater private investment into the sector.
|Panama To Outperform|
|US, Panama, Colombia And Latin America Construction Industry Real Growth, % y-o-y|
The company's exposure to the Central American and Caribbean markets also presents potential for growth as the development of transport and energy infrastructure moves forward. One of the company's biggest strengths will be its exposure to Panama, where the company is involved in the Panama Canal Expansion and the construction of Panama City's metro line. The country holds the second largest construction industry in the region, and is posting some of the highest growth rates seen globally. In addition, we highlight a significant opportunity for Cemargos in Central America should one of the three inter-oceanic canal projects in Nicaragua, Honduras or Guatemala be built (see ' Joining Central America's Inter-oceanic Canal Club', 27 Jun).