Cementir has published its detailed financial results which confirms our view regarding the company’s laudable cash flow management. Overall, the result is in line with our expectations, with Turkey performing significantly better than what we expected. In addition to the macro-economic scenario in Turkey, the 2019 profits were impacted by a scope impact, higher financial charges, and one-off additional taxes.
Cementir Holding’s FY19 earning release was largely in line with our projections, with net income slightly above our expectations (+5%) because the margins in Turkey were hit far less than we expected. Net income was subjected to higher financial costs due to the strengthening of the USD (since the loan associated with LWCC is in US dollars) and the exercise of its credit line. Furthermore, the company was also subjected to higher one-off taxes, which should return to a ~25% rate in 2020.
China amid Coronavirus
Cementir has a low exposure to China (6% EBITDA contribution in 2019) and, hence, the Coronavirus will not have any significant impact on its profitability (based on the current situation and if it does not become a pandemic issue). The operations in China were halted for only three weeks, that too during the maintenance period. Operations have recommenced and the group believes that it will be able to catch up the lag and continue operating on its normal trajectory by the end of April. Based on the current scenario of the Coronavirus, the company’s outlook resonates with our own outlook.
Low visibility for M&A going forward
While the group has low leverage and strong cash generation, management has commented that the group is currently focusing on strengthening its green footprint rather than inorganic growth. The green investment, detailed in our report “_When cement goes green too_”, remains at the heart of the group in 2020. Furthermore, the group is interested in expanding white cement production by developing a greenfield facility in Asia, but the glitch in the Asian market due to Coronavirus has slowed down the group’s efforts and a new greenfield facility cannot be expected until 2023 at least.
Geographical outlook
For 2020, Denmark can be expected to grow in a low single-digit, Sweden in mid single-digit and Norway will continue to deteriorate as it has already enjoyed a favourable and strong market for many years. The Belgian and French markets will continue to remain strong due to efficiency optimisation and multiple infrastructure projects, with Grand Paris being the crown jewel. The US market saw unfavourable weather and strong competition in 2019, which might be the case in 2020 as well, but a new management is expected to take over in early 2020. We view the performance of the new management as being highly important in determining the amount of further growth and, for the time being, we expect single-digit growth in sales, with lower than sales growth for EBITDA. We expect low single-digit growth in sales from APAC. In the Mediterranean region, the market in Egypt should continue to improve and, despite some improvement in the Turkish market in the last three months, the devaluation of the lira will offset this improvement; ergo, we will not see any improvement there.
We have updated our model with the 2019 figures provided by the group, following which our target price has slightly increased. However, we will modify our estimates for the following years after the group publishes its annual report.
