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. This material does not constitute research.

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.

Declan Hanlon
declan.hanlon@santander.us
1 (212) 973-7658

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.