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Stock Picks For The Week (Jul 17 - 21, 2017) By First Metro Securities

Check out the Stock Picks for the week by First Metro Securities in this special report which you can find only here in PinoyInvestor.

52

CEMEX Stock Review: IPO That Aims To Pay Debt

cemex stock review

CEMEX (CHP) will be listed on the PSE this coming July 18. Right now, many investors are curious about the company including me. Just like other investors, I’m curious if the company has the ability to sustain growth. If they can, then this will be a good investment.

In this review, I’ll highlight and summarize the important facts found on their prospectus. As responsible investors, we need to be informed right?

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Quick Facts About CEMEX

Here are some quick facts about CHP.​

  • One of the leading cement producers in the Philippines.
  • Has established cement brands such as “APO”, “Island” and “Rizal”.
  • CHP is a newly formed subsidiary of CEMEX Asian South East Corporation which is a wholly owned indirect subsidiary of CEMEX España, S.A., which in turn is indirectly owned by CEMEX, S.A.B. de C.V.
  • Operates two cement plants; APO Cement Plant in Cebu and Solid Cement Plant in Rizal.
  • Products include cement, ready-mix concrete, admixtures and clinkers.

Here’s a list of the company’s subsidiaries.

Operating Subsidiaries​

  • APO Cement
  • Solid Cement and its subsidiaries
    • Ecocast Builders, Inc. and Ecopavements Inc.
    • Ecocrete, Inc.
  • Falcon Re Ltd.
  • CEMEX Asia Research A.G.

Investment Holding Subsidiaries

  • Edgewater Ventures Corp. and Triple Dime Holdings
  • Bedrock Holdings, Inc. and Sandstone Strategic Holdings
  • Enerhiya Central, Inc.
  • Newcrete Management Inc.

Solid Cement’s Minority Investments

  • Calabar Aggregates Corporation
  • Greencrete Inc.

From the company’s description, it sounds like a good company to invest in right? I mean who doesn’t want to own shares on one of the largest cement producers in the Philippines?

Now let’s take a closer look on why they went public.​

Why Is CEMEX Offering Shares To The Public?​

CEMEX targets to collect net proceeds of approximately 32,832.6 – 37,757.5 Million Pesos. It seems that the proceeds from the offer will be used to pay a short-term loan worth 23,771.7 Million Pesos and the refinanced BDO loan and as partial payment for a long-term loan worth 16,649.6 Million Pesos with NSH, a subsidiary of CEMEX due to reorganization. The loans were entered last March 16 of this year.

The reorganization summary is illustrated on the following pictures below.​

cemex stock review

Summary of the organizational and ownership structure prior to the reorganization.

cemex stock review

Summary of the organizational and ownership structure as of December 31, 2015.

cemex stock review

Summary of organizational and ownership structure as of the date's prospectus.

If the proceeds come short, they’ll refinance the debt to a longer tenor with NSH or refinance with another lender.

What about business expansion or investing? According to the prospectus, no part from the proceeds will be used to acquire other businesses, assets or offered as loans to other subsidiary companies. This means that they don’t aim for any expansion. They just want to pay their debts to NSH.

What About The Dividend Policy?​

There isn’t any formal dividend policy yet but they said that they will declare dividends whenever there are unrestricted retained earnings.

According to them, the ability to pay out dividends will depend on whether they received sufficient dividends from the company’s subsidiaries to pay out to shareholders.

If you’re a dividend investor, this is something you should consider about.

Understanding CEMEX’s Debt Structure​

I now know that the purpose of the IPO is to pay their loans to NSH because of reorganization. But what exactly is this about? Well this is kinda tricky considering CEMEX’s intricate organizational structure. But nevertheless, I’m here to give the easiest explanation as possible.

In the 3-month balance sheet as of March 31, 2016, there’s a line that says in the Current Liabilities as Payable To Related Parties amounting to 49,411.364 Million Pesos. One of the current payable comes from New Sunward Holdings BV (NSH) amounting to 47,825.147 Million Pesos. The explanation of this amount is explained below.

cemex stock review

Explanation of the current payable to NSH.

To further understand this complicated scenario, I’ve summarized what happened and below is the explanation.

  • Before reorganization, CEMEX had a presence in the Philippines through different affiliates and other companies in which CEMEX had minority equity ownership interests in cement and land & mining companies such as APO Cement, Solid Cement, IQAC and ALQC. We call this the “CEMEX Philippines Group”.
  • In preparation for the IPO, the group decided to separate the cement companies from the land & mining companies. On September 17, 2015, CHP was incorporated as a holding company for CEMEX’s cement business.
  • More reorganization took place after that. Companies sold their equity interests to other companies in preparation for the IPO.
  • Finally, on January 1, 2016, CHP acquired 100% equity interest on Solid Cement and APO Cement. The business acquisition was made possible by the assignment of shares from CEMEX Asia Holdings, Ltd., CEMEX Asia-Pacific Investment and CEMEX Asia B.V.
  • On March 1, 2016, the related parties’ right to collect were transferred to New Sunward Holdings B.V. through an assignment agreement. For this to be settled, CHP entered into a short-term and long-term loan agreement with NSH on March 9, 2016. the loans amounted to US$857 Million.
  • To pay for this loan, CHP decided to go public to raise US$535.82 Million.

This is what it’s all about. This is not bad at all in my opinion. The debt incurred is caused by reorganization, not because of management stupidity or what.

Valuations​

The prospectus provides combined financial statements of all the company’s subsidiaries. So let’s take a look at it if this is a company worth investing.

The Revenue and Net Income looks good.​

cemex stock review

12.58% CAGR.

cemex stock review

68.87% CAGR.

Although both seems to be rising, the ratio between them is not a good indicator.

Description

2013

2014

2015

Net profit margin

2.70%

2.60%

9.12%

Tab. 1 Net profit margin.

This would be better if the percentage ratio shows greater than 20%.

It seems like their Cost Of Revenue and Operating Expenses when added is too high.

cemex stock review
cemex stock review

It’s evident from these data that the cement industry is not as profitable as it seems. If the real estate and construction industry will boom then significant increase in sales should also be felt in the cement industry.

The Cash & Short-Term Investments and Retained Earnings shows an increase every year which is good.

cemex stock review
cemex stock review

The Shareholder’s Equity is also increasing which is also good but the Return On Equity is not attractive due to low earnings.

cemex stock review
cemex stock review

Overall, the financial figures failed to impress me. The numbers tell me that cement business is a very tough and competitive business. The high cost of sales and operating expenses eats up almost all the profit. They need to increase sales and to do that, the construction industry must boom in order for the demand for cement to rise. Not only that, they have to find ways to fight competition too.

Final Thoughts​

I like companies that has sustainable growth and has a long-term competitive advantage. In the case of CHP, I don’t see that criteria. I might as well invest in other companies that can grow faster or make a lot of money. Since the data provided is only in the 3-year period, I can’t predict for sure how consistent the projections will be 5 to 10 years from now.

The stock may rise and fall on its first listing day due to sentiments so trade with caution and caveat!

This concludes my CEMEX stock review. Be sure to leave a comment for any questions and reactions below.

Happy investing!​

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