The Long and Short
Cemex keeps moving toward investment grade
Declan Hanlon | October 27, 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.
In a solid third quarter performance, Cemex, a global leader in the cement industry, has posted financial results that should keep it moving toward an investment grade rating after more than 14 years as a high yield credit. The company managed to capitalize on price increases and lower input costs as inflationary pressures somewhat eased, positioning itself well for the future.
The company’s steady increase in prices, absorbed effectively in core markets, coupled with lower cost inputs, has set the stage for coming quarters. This potentially paves the way for Cemex to surpass its 20% margin target, which had proven elusive over the past year. The company consequently has raised its guidance for the year.
The revised guidance now anticipates the company will achieve EBITDA of $3.3 billion for the full year, a nearly 20% increase from the initial target and aligning with consensus expectations across the financial sector. In this amended guidance, Cemex adjusted its working capital investments, reducing them from $250 million to $100 million, while also increasing expected taxes from $400 million to $550 million. Management has reiterated its guidance of a mid-single-digit decline in operational volumes.
Cemex’s leadership remains bullish about the year ahead, anticipating it to be the company’s best since 2006. This optimism stems from disciplined sector pricing and solid volumes in most regions. The U.S. market continues to be a significant driver, with strong pricing despite lower volumes for cement and ready-mix. U.S. revenue has seen a 5% year-on-year growth, reaching $1.39 billion, primarily driven by robust cement pricing.
Cemex’s third-quarter performance exceeded expectations. Consolidated revenue reached $4.57 billion, driven mainly by strong performance in Mexico. Meanwhile, consolidated EBITDA reached $910 million, outperforming the consensus, driven by better-than-expected results from South America, Central and the Caribbean (SACC), Europe, and Asia, with a margin of 19.9%.
The company’s net debt-to-EBITDA ratio stands at 2.2x, and it boasts a coverage ratio of 7.6x, bringing it closer to regaining investment grade status.
Investors are closely watching for the formal ratings upgrade, which should come in the near term. Cemex has positioned its balance sheet favorably among industry investment-grade peers, both in terms of ratios and stability in operating gains. This ratings improvement is the key catalyst anticipated for the credit.
Throughout the year, Cemex’s solid credit profile has been evident, benefiting from strong US credit price performance, where it consistently attracts crossover interest. The market has already started to view Cemex as a potential investment-grade issuer when compared to non-emerging market (EM) cement companies. Therefore, the expected investment grade rating by Cemex is likely to lead to further spread tightening as the investment-grade technical factors come into play.
Cemex compares to other ‘BB’ crossover investment grade credits, such as Nemak, where spreads are now about 110 bp through after being near flat early in the year, despite Nemak’s investment grade rating by Fitch – partly reflecting Cemex’ material crossover interest compared to the core emerging markets Nemak investor base. 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 200 bp once again – with a bonus 7-point pick in the Nemak 2031s. Further, looking at Cemex against investment grade non-emerging markets cement issuers, such as HOLNSW, three notches higher and about 30 bp tighter, it seems 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, as the investment grade technical kicks in. The increased probability for ratings upgrades for Cemex should drive standalone spreads tighter, pulling Nemak along, on a relative basis. Within the Cemex capital structure, we like the Perps at greater-than-9% yields to an expected call date inside a pro-forma investment grade balance sheet.