The Long and Short
Upgrade potential for Cemex
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, a leading cement manufacturer, reported better-than-expected results for the second quarter of the year. The company capitalized on robust price increases in its core markets while lowering input costs amid easing inflationary pressures. It looks set to benefit from both past and likely future price hikes and could surpass its 20% margin target, which proved challenging over the past 12 months. The company has revised guidance for the year, indicating a potential return to an investment-grade rating after a 14-year hiatus. The rising probability of an upgrade should drive Cemex spreads tighter.
According to the new guidance, Cemex expects EBITDA to hit $3.25 billion, an approximate 18% increase from the previous target and about 8% higher than consensus estimates. While the company adjusted down is overall volume outlook for 2023, it remains confident in its pricing strength. Particularly noteworthy is the robust pricing environment in the US and Mexico.
Although weather affected volumes in the US during the second quarter, resulting in an 8% decline, the company managed to drive a 10% increase in top-line growth, amounting to $1.42 billion. This growth was bolstered by pricing improvements of up to 15% year-on-year, as well as operating leverage and reduced maintenance costs. Notably, Cemex raised cement prices again in early July, though the full extent of the impact is yet to be determined.
In Mexico, cement prices expanded by an impressive 12% year-over-year during the same quarter, further contributing to Cemex’s positive performance.
Overall, Cemex’s revenue surpassed consensus expectations, reaching $4.57 billion, reflecting a 12% year-over-year increase. EBITDA was the highlight, boasting a substantial 34% year-over-year gain at $961 million, driven predominantly by the impressive 36% delta in the US. The company’s EBITDA margin also showed marked improvement, rising by 330 bp over the corresponding period last year to 21.1%.
Noteworthy is Cemex’s efforts to manage its balance sheet metrics effectively, despite challenging operational circumstances over the past 12-18 months. Net leverage, for instance, stood at 2.45x at the end of the second quarter of 2023, compared to 2.62x at the end of the first quarter, 2.84x at the end of the fourth quarter 2022, and 2.88x in at the end of the second quarter 2022. The company has strategically undertaken discounted bond buybacks, contributing to this success.
The potential for an investment-grade rating, combined with the company’s improved liquidity and cost management, has already resulted in improved ratings from S&P and Fitch. S&P raised its rating to BB+ (Stable) in December, while Fitch recently upgraded its rating to BB+/Positive.
The positive outlook for Cemex has already translated into favorable market pricing, evident in its solid U.S. credit price performance and consistent crossover bid. In comparison to other BB/Crossover IG credits, such as Nemak, Cemex presently trades about 70 bp through the peer Mexican credit. This differential reflects Cemex’s material crossover interest versus the core EM Nemak investor base. An anticipated investment-grade rating for Cemex may drive further spread widening between the credits, presenting potential opportunities for investors in the market. From here, an anticipated investment grade rating by Cemex should drive incremental widening between the credits, likely resulting in cheapness for Nemak, if the spread differential surpasses 100 bps once again – with a bonus 5pt+ pick in the Nemak 2031s. Further, if we review Cemex against investment grade non-EM cement issuers, such as HOLNSW, three notches higher and about 40 bps tighter pre-earnings, we can see that the market has already begun to view Cemex as a potential investment-grade issuer, though Cemex spreads will still likely tighten further on the actual upgrade.
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