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Betting on Mexico's Next Infrastructure Boom
Posted by: Fede Zaldua (IP Logged)
Date: January 20, 2014 09:57AM

The cement sector in Mexico could be disproportionately benefited if the government created a very much expected housing program that effectively gives low income families access to a good quality unit. In order for this to happen the government would need to buy the land and play a role in the construction of the units, which could be sold at affordable prices given the subsidized land. Since the housing sector represents over 50% of cement demand in Mexico, a boost to housing construction would also be a boost to Mexico's cement sector, which had a below than average year in 2013 in terms of total volume. Here I will take a look at the two most salient Mexico related cement bets.

Plausible Mexican Cement Bets

The two most obvious Mexican cement and construction related bets are the international giant Cemex (CX), which produces up to 33.8% of its EBITDA in the local market, and the much smaller and diversified across sectors ICA (ICA), which generates almost all of its sales in Mexico.

For Cemex's local (Mexico) business, 2013 was a below average year: Cement volumes came down by 13% year over year while ready mix and aggregates were down by 9% and 1% year over year, respectively. That said, the company now expects a reversal given by a sharp increase in government infrastructure spend. On the other hand, Cemex's U.S. (10% of the total EBITDA) and Northern European businesses are now thriving hand in hand with the going housing recovery. Cemex, which is still highly leveraged (its net debt to EBITDA stands at around five times EBITDA) although reducing debt fast, sells for 8.7 times 2014 EV/EBITDA and 130% its book value.

The much more diversified ICA is basically a government contractor that holds concessions in different sectors. The company controls businesses that go from water treatment plants to highways and prisons. As a matter of fact 82% of its backlog is public sector contracts. Even when last year was a tough one for the company (2013 company revenues were down by 27% versus 2012 while net income fell by well over 70%), the current year should see a rebound in both revenues and earnings. Nevertheless, its huge debt obligations might force ICA sell concessions or add more debt to its already highly leveraged balance sheet (net debt stands at 7.5 times EBITDA). Overall, 2014 shall be a busy year for ICA. The company will benefit from the increased infrastructure spend in housing projects and highways but will also have to let go some of its businesses in order to comply with its debt obligations. ICA, which is down by 4% year-to-date, sells for 11 times 2014 EV/EBITDA and 90% its book value.

Bottom Line

While ICA is a very broad collection of government-related businesses, Cemex, which is held by George Soros (Trades, Portfolio), is much more diversified geographically and a more direct bet on construction spending. Even when I believe ICA will be able to sell at a fair price some of its many businesses in order to meet its debt obligations and get new contracts related to housing programs, I also believe that pure plays such as Cemex are easier to value and safer long-term bets. With this in mind, if I wanted to make a bet on Mexico's next infrastructure boom, I would go long Cemex.

Stocks Discussed: CX, ICA,
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