CEMEX S.A.B. de C.V. (CX, Financial) has lost more than 50% value over the last seven months. This is not a pretty picture for the company whose balance sheet is highly geared while the strong U.S. dollar continues to affect its reported income.
CEMEX is a building materials company that produces, markets, distributes and sells cement as well as ready-mix concrete, aggregates and other construction materials globally. CEMEX is the largest player in the cement industry with a market capitalization of about $74 billion. The company generates revenue of roughly $13 billion per year and a gross profit of about $4.6 billion.
CEMEX has been under intense pressure in recent years as its long-term debt soared to record highs through 2013 before managing to reduce it slightly in 2014 to about $13 billion. However, the figure has increased again to new record levels of $14.86 billion, and this fact has not gone unnoticed by investors.
[CEMEX pilot project in Berlin showcases specialty concrete with recycled aggregates]
They have resolved to punish the stock accordingly with increased negative sentiment now evident as per the share price. As such, it is ideal to say that investors have been judging the company based on its staggered balance sheet, which it may need to improve in order to boost share price performance.
Why CEMEX can overcome balance sheet woes
CEMEX currently realizes 3.15% return on its $34.9 billion assets. A couple of years ago, the company had more than $37 billion in assets, but it has been on a campaign to reduce that number. This process was initiated to help it handle the gigantic debt that settles on its balance sheet while at the same time improving the return on assets.
CEMEX is selling the least productive assets in its portfolio, and this would not only improve cash flows but also net operating margins. The company is using proceeds from asset sales to service some of its long-term debt commitments while the rest is being reinvested in highly productive projects.
Five months ago, the company announced plans to sell some of its European projects toward this course, totaling €391 million or $438 million (then). This was to be part of a grand plan that would see CEMEX divest $1.5 billion worth of assets in the near future.
The company revealed plans to sell three cement plants, two aggregates quarries and seven ready-mix concrete plants in Croatia to Duna-Drava Cement for ~€231 million or $252 million (based on current rates). It also announced that it was going to sell 29 aggregates quarries and 64 ready-mix plants in Austria and Hungary to Rohrdorfer Group for ~€160 million, which is about $174 million.
The ~€160 million worth of asset sales in the Austria/Hungary projects completed in November, and this already shows progress in the divestiture program.
These asset sales follow a sequence of quarters in which the company missed analyst estimates on revenues, with the $3.7 billion reported in the most recent quarter missing by $280 million. Nonetheless, there were a few positives to pick out with operating EBITDA up 5% to $677 million.
The U.S. and Asia year-over-year revenues were up 9% and 7%, but Northern Europe (-21%), the Caribbean (-19%) and Mexico (-17%) reported massive declines as currency translation effects weighed negatively on results.
However, every investor knows that earnings results are not just about what happened but also what is expected to happen in the coming quarters. The company expects to cut costs and expenses by $150 million this year while financial expenses were down $142 million for the three-month period. The company is also on course to reduce debt by $500 million to $1 billion this year and has already achieved a massive efficiency level in working capital currently at 22 days.
CEMEX is also enjoying record EBITDA levels having reported the best EBITDA margin of 13.2% for the three-month period. This can only get better with increased cost-cutting measures that are being implemented. It also reported a 25% increase in free cash flow to $436 million up from $349 million reported in the same period last year, again which relates well on the company’s efforts to improve working capital.
CEMEX also appears to be managing its debt well with just $372 million maturing in 2016 while 2017 has a figure of $432 million. With the continued asset sales and improving margins, servicing this debt should not be a major issue in the next few years.
The company is also well on track to reducing the cost of debt after refinancing $1.94 billion with new funds from 17 financial institutions in the most recent quarter. This should help the company realize more cash flows in the coming quarters, which will then ease the weight on its staggered balance sheet.
So should you bet on CEMEX shaking up the debt load?
CEMEX is currently on a program that is intended to ease its gigantic debt. However, investors should know that debt is pretty much a good thing to have on the balance sheet for an industrial company. Companies borrow money to finance various projects that often bring returns down the line.
What CEMEX did is that some of these financed projects did not deliver according to expectations for various reasons, including adverse currency translations, fluctuating cement prices as well as changes in economic policies in markets like Mexico and slowdown of global economies.
Therefore, the company has taken the necessary step of divesting some of these unyielding projects in a bid to improve its gearing ratio. The expected outcome of this move would be better working capital and manageable debt.
Now, from a valuation perspective, CEMEX appears pretty expensive primarily due to the fact that its earnings declined significantly over the last few years.
Results from the current fiscal year have also not been very good on both top and bottom lines as production volumes declined across the board with a few exceptions. Nonetheless, some of these declines can be observed with a positive view as they are the results of ongoing asset sales, which have resulted in the closure of some of the revenue streams from yesteryears.
As such, shares of CEMEX may fall further in early 2016, but there is still the possibility that a rebound could be around the corner. However, the long-term view remains positive as the reduction of debt and possible turn of fortune with improved macroeconomic forces could trigger better cement prices, increased production and favorable forex atmosphere.
Conclusion
The bottom line is that CEMEX has been hard hit by the burgeoning debt on its balance sheet as investors took it as a sign of weakness. However, the company appears to have found a way to deal with the situation, and this should be at least seen as a realistic way back to better days.
CEMEX may not appear cheap for the moment, but signs are that the stock could be set for a rebound should the asset sales program play out as planned.
