Tags: Cemex | CX | cement | Mexico

Mexico’s Cemex a Potential Bargain

By    |   Wednesday, 31 Aug 2011 12:45 PM

Mexico’s Cemex (CX), the largest supplier of cement to the United States, is being dragged down by the sluggish U.S. construction sector. Cemex has increased sales in other regions, especially northern Europe, but the company’s ability to pay its debt remains strongly linked to the moribund U.S. housing market.

Cemex, which is based on Monterrey, has an annual production capacity close to 97 million metric tons and $44 billion in assets, but the global economic crisis has hammered sales since 2008.

Things are not getting much better. In the second-quarter it reported a net loss of $294 million, which was slightly smaller than the $306 million loss it posted in the same period of 2010 but worse than analysts’ expectations.

The loss was mainly due to weak U.S. demand. Cemex's sales in the United States dropped 9 percent as domestic gray, ready-mix, and aggregates volumes fell. Higher restructuring and severance payments totaling $202 million also hurt as Cemex slashed its workforce worldwide by 6 percent as part of cost-cutting efforts.

Higher volumes in Europe, South America and Mexico — mainly driven by demand in the infrastructure and residential sectors — mitigated the impact of the U.S. slowdown, driving overall revenue up 9 percent to $4.1 billion.

Cemex's ability to generate cash is key, especially given its high debt, mainly originating from its 2007 takeover of rival Sydney cement giant Rinker just before the U.S. housing market collapsed. In June, Cemex cancelled a $650 million bond offering as Europe’s debt crisis eroded demand for higher-yielding debt.

Cemex had planned to sell the bonds to repay debt stemming from a $15 billion bank loan refinancing in 2009 that helped it avoid default. Since then, the company has had to refinance its debt on several occasions to prevent interest payments from climbing further.

Cemex has enough funds to meet its debt obligations through 2013 and does not plan to issue more debt this year, said Fernando Gonzalez, executive vice president of finance and administration, in a conference call.

Waiting to rebuild

A vibrant U.S. construction market is crucial to the recovery of Cemex’s credit profile, Fitch Ratings said earlier this month.

Fitch affirmed the issuer default ratings of Cemex and its subsidiary, Cemex Espana, at B but changed the outlook to stable from positive.

The revision reflects “anemic prospects for private construction activity in the United States in the near term due to a weaker than anticipated recovery of the U.S. economy,” said Fitch.

According to the Portland Cement Association, U.S. consumption of cement fell to 70 million metric tons in 2010 from 127 million metric tons in 2006, at the same time as Cemex’s EBITDA plummeted.

Barclays Capital initiated coverage of Cemex in late June, giving it an equal weight rating and a $9 target price. Cemex’s ADR is currently trading well below that and just above its 52-week low of $4.86, which means it could be a bargain.

But much depends on U.S. housing. New housing starts fell again in July while the number of permits requested also fell. Cemex next reports on Oct. 26.

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Mexico s Cemex (CX), the largest supplier of cement to the United States, is being dragged down by the sluggish U.S. construction sector. Cemex has increased sales in other regions, especially northern Europe, but the company s ability to pay its debt remains strongly...
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Wednesday, 31 Aug 2011 12:45 PM
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