The Long and Short
Relative value firms up in Cemex
Declan Hanlon | May 5, 2023
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Cemex SAB de CV has already brought its balance sheet ratios a long way toward its industry investment grade peers. And from here, the company will need stability and steady operating gains for its ratings to improve further. That is the key positive catalyst on the horizon for the credit. Market pricing has reflected the solid Cemex credit profile, as well as the solid broad US credit price performance through the first quarter of 2023. Cemex looks like a good add for US dollar credit portfolios, along with similarly rated Mexico credits such as Nemak.
Rising ratings for Cemex
During the financial crisis in 2008, S&P downgraded Cemex to ‘BB+’ from ‘BBB-‘ and proceeded to take the rating down to ‘B-‘. The rating actions reflected rising debt levels and liquidity concerns as the global industrial cycle froze after Lehman collapsed. In the ensuing 15 years, the company has steadily regained a focus on balance sheet repair and a return to investment grade status, with specific milestones posted and mostly achieved in recent years. Though market conditions became more challenging in recent quarters on the back of higher interest rates, cost inflation and global recession fears in core markets, the work done to decrease leverage and improve liquidity has resulted in a series of ratings gains by the agencies, with S&P being the latest to improve its rating to ‘BB+’ (Stable) in December after Fitch had reached that level last June.
Stronger financials for Cemex
In the recently released first quarter 2023 results, higher cement prices across the Cemex footprint—and an assist from foreign exchange in Mexico—helped drive continued strength at the top line with Cemex printing a 9% increase in net sales to $4.04 billion. This follows the 12% gains in both the third and fourth quarters of 2022. Further, though cost inflation remains an overhang on the company’s attempts to drive margin back to 2019 levels above 18%, the first quarter’s 18.2% margin compared to a year-ago margin of 18.4% in Q122. Still, the first quarter’s performance was noticeably better than the 17.2% in the fourth quarter of last year. EBITDA overall gained 7% over the corresponding period in 2022 to $733 million, growing for the first time since 3% growth in the first quarter of 2022. This was engendered by decreasing cost pressures as well as the price increases announced in the first quarter this year across core markets with sequential improvements in Mexico and the US market the most notable – despite the weather impacts in the latter. This EBITDA performance was above full-year guidance for “low single-digit EBITDA growth”, suggesting some room for guidance upside if the current traction is maintained. Given the plans for further price increases, there is upside to the existing guidance, free cash flow generation for the full year and subsequent further deleveraging.
Net leverage ended the first quarter at 2.62x helped by higher cash balances, last-12-month EBITDA and particularly the approximately 0.4x equity benefit from the recent hybrid issuance. This compares to the fourth quarter of 2022 at 2.84x, the third quarter of 2022 at 2.82x at 3Q22 and the second quarter of 2022 at 2.88x– illustrating the company’s ability to manage balance sheet metrics, aided by discounted bond buybacks despite the challenging operational backdrop. Reaching an investment grade rating once again remains a near-term strategic objective. And though cost pressures weighed on operating results, price momentum and lower costs appear likely to result in the eventual success, potentially by year end, given the outperformance this past quarter.
Anticipating tighter spreads on a Cemex upgrade, opportunity in Nemak, too
The renewed probability for ratings upgrades should drive Cemex standalone spreads tighter. And that should eventually pull related credits tighter, too. Cemex generally garners a consistent crossover bid, with spreads to the Nemak 2031s ratcheting in from third quarter 2022 wides of 215 bp to as tight as ‘flat’. Spreads are now back to around 145 bp tighter than Nemak. While Nemak is already investment-grade by Fitch, it does not retain the material bid from crossover investors; however, the recent spread divergence once again makes the auto parts supplier look undervalued to its lower-rated Mexican comparable, with a 9-point pick in the bonds as a bonus. If Cemex gets upgraded, that should drag Nemak along on a relative value basis.