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Mark Yu
Mark Yu
Articles (412)  | Author's Website |

Holcim: A Way to Invest in Philippines’ Continuing Growth?

New president wants to build more infrastructure in the third world country

August 07, 2016 | About:

The Philippine Composite, PCOMP or PSEi (EPHE), had returned 12.47% since the new Philippine president, Rodrigo Duterte, declared victory on May 10.

(PSEi 12% return, Bloomberg)

(World Markets, Advisor Perspectives)

The PSEi is not the only index demonstrating this return since May. Except for Nikkei and Shanghai indices, most of the major indices globally demonstrated a good return for the same time frame. The S&P 500, for example, returned 4.15%.

Infrastructure and GDP growth

According to a local business newspaper, the Duterte administration intends to ramp up infrastructure spending and improve the country’s overall GDP to 5% during its six-year term. Most analysts are already anticipating that the new administration would make more projects compared to the only a dozen infrastructure public private partnerships* (PPP) projects, which was worth $4.2 billion*, that the previous administration made.

Regardless, this forecast of growth opportunity would bring improvement in almost all of the businesses related to a growing economy. Further, reviewing a dominant player in the local cement industry may reveal an opportunity.

Holcim

Holcim Philippines was incorporated in 1964. The company mainly manufactures, sells and distribute cement and clinker* in the Philippines. Holcim has returned 24% since May 10.

As of its recent annual filing, the company claimed that it had the most extensive sales and distribution network in the Philippine cement industry. Holcim had a total installed clinker production capacity of 6.2 million tons per year (MTPY) and cement production of 10.2 MTPY.

As of December 2015, Holcim is majority-owned (60.55%) by Union Cement Holdings Corporation, while the other one-fourth of the company is held by Holderfin B.V (18.11%) and Cemco (7.08%) and the remaining 14.26% is being traded in the local stock exchange. Regardless, the set up does not give any possibility of a hostile takeover of an outsider without the cooperation of other major shareholders.

Holcim has several subsidiaries and associates. These are Holcim Philippines Manufacturing Corporation (HPMC), Holcim Mining and Development Corporation (HMDC), Excel Concrete Logistics (ECLI), Holcim Philippines Business Services Center, Inc. (HPBSCI), HuBB Stores and Services, Inc. (HSSI) and Mabini Grinding Mill Corporation (MGMC).

Subsidiary Holcim Philippines Manufacturing Corporation (HPMC) contributes the most 1.8 MTPY, or 29% to the company’s overall clinker production.

Last year was quite an active year in terms of ownership changes for Holcim and its subsidiary Holcim Mining and Development Corporation (HMDC).

HMDC was previously owned by Holcim, the parent company, and its other subsidiary, Holcim Philippines Manufacturing Corporation (HPMC). In October 2015, Holcim Philippines Inc. Retirement Fund (RF) came into the picture and was allowed to subscribe 60% of total outstanding stock of HMDC. This change of ownership had negatively impacted Holcim’s cash flow from operations by 2.64 billion PhP.

HMDC, according to the annual filing, is a subsidiary that holds a Mineral Production Sharing Agreement in Rizal, Philippines. HDMC also has made a significant acquisition last year. HDMC acquired a group of companies called "Lafarge entities." The entities included four more subsidiaries, which mostly are engaged in mining, processing and sale of quarry resources. Notably, HMDC and its subsidiaries had some 5 billion PhP in debt as of December 2015.

Sales and profits

In Q2 2016, Holcim demonstrated 14.4% growth to 10.7 billion PhP in its sales compared to the same period last year. Meanwhile, the company grew its profits by 41.82% to 2.16 billion PhP. Notably, most of the profit growth came from the "other income" section of Holcim’s financial statement. The segment gave Holcim an additional 67 million PhP to its earnings before income tax compared to losing 3.49 million PhP the same period last year. Holcim did not really specify what or where the growth came from that gave the boost in its "other income" recently.

In the second quarter results, Holcim has this to say about the direction of its business operations:

“The new administration’s vow to further increase infrastructure investments to 7% of GDP bodes well for the entire country. Holcim Philippines stands ready to support the country’s sustained development by working to keep the market supplied through the timely completion of our project increasing cement capacity to 10 million tons and through the introduction of more innovative construction solutions to help the sector build faster and better.”

Eduardo Sahagun, Holcim president and CEO

Holcim breaks down its sales into just two parts: cement and cementitious materials and others. Both segments grew over the past three years, but others did the heaviest lifting. In 2015, revenue of others demonstrated 125% growth, while the cement business grew by 12%. The others business segment, I believe, was not clearly defined as to which specific products were included in the group in its recent annual report.

Interestingly, the company’s export business had been declining over the recent years and eventually had stop exporting its cement in 2015.

Cash, debt and book value

According to Financial Times data, Holcim had total cash of 5.1 billion PhP as of June 30. The company had no debt found in its financials as of the recent quarter even with its subsidiary’s (HMDC) 5 billion PhP debt intake in 2015. On the other hand, Holcim had stated that it had “100% decrease in notes payable, attributable to full payment made by the company for a third party bank loan.”

Cash flow

In 2015, Holcim was able to grow its cash flow from operations by 24% to 7.8 billion PhP. The cement company had spent 2.45 billion PhP in capital expenditures, leaving the company with $5.38 billion free cash flow. Holcim also had paid out almost all, 98% or 5.3 billion PhP, of its free cash flow as dividends to its shareholders. On average, the company had paid out 107% of its free cash flow as dividends in the past three years. Further, the company reduced its debt by 1.57 billion PhP, but also took in 1.625 billion PhP in loan. Nonetheless, Holcim stated that it had no debt on its balance sheet as of June 30.

Valuations

Holcim Philippines currently trades at a trailing 12-month PE ratio of 12 times, PS ratio of 2.62 times and PB value of 4.60 times. The company also has a dividend yield of 5%.

Conclusion

Holcim’s financials and share price performance recently had been nothing but wonderful. The company also has an ongoing catalyst whereby it can further grow its cement business. However, lack of information in Holcim's major shareholders, including the change in ownership in one of its indebted subsidiaries with the involvement of its retirement fund last year, exclusion of certain financial statement information* and insufficient business segment reporting as can be observed in the recent Q2 filing are some of the signs I would seriously consider first prior to initiating a long position.

Disclosure: I do not have shares nor plan to initiate a long position in Holcim Philippines this week or next.

Notes and explanations in order of appearance:

*PPP: a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance.

*1 USD = 46.91 Philippine peso (PhP) as of 8/6/2016.

*Clinker: clinker is an intermediate product in cement production. The company sells clinker usually in bulk.

*Found in p. 11 of Holcim's Q2 financial report: PAS 27, "Separate Financial Statements-Equity Method in Separate Financial Statements." Holcim considers the excluded data non-material or does not have any impact in Holcim's consolidated financial statements.

About the author:

Mark Yu
I'm a doctor in physical therapy (DPT) with a passion for finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

I attempt to dissect one company filing every day. I dislike goodwill and intangible assets.

One company (review) a day keeps the speculation (hopefully) away.

"The only source of knowledge is experience."

"I have no special talent. I am only passionately curious." - Albert Einstein

"To strive, to seek, to find, and not to yield." - Alfred, Lord Tennyson

"We find one a year, that's terrific. You do not need a hundred or a thousand great investment ideas to do well. You need a couple. And, the discipline is the most important thing." - Warren Buffett

Visit Mark Yu's Website


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