Holcim: YoY Energy Price Declines Helping EBIT

seekingalpha08-14

While not an entirely globally integrated market, there might be some import threat to Holcim AG from cement capacity growing meaningfully in markets like India.For now, the outlook looks alright and ...

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The company managed to reduce fixed costs.We aren't totally sure those COGS declines will be enduring, but even if EBIT levels are sustainable, we aren't sure about Holcim AG's value compared to peers.AdrianHancu It's been a few years since we last covered Holcim AG (OTCPK:HCMLF, OTCPK:HCMLY), where we last focused on COVID-19 related infrastructure spending as possibly the basis for buying the company which produces primarily cement and concrete. There definitely has been growth in heavy construction in most markets, and there are still signs that large-scale projects in geographies like the US are still in action and growing. While this isn't a one-to-one factor in predicting growth in demand, the organic growth trends are solid enough for Holcim for now, with revenue developments showing resilience as we move to a new phase in the cycle. Although, we do generally worry about cement supply over the next half-decade. EBIT performance was a standout this latest quarter, and the reason is primarily the benefit of falling electricity prices. Falling freight costs too are a help. The value case isn't particularly compelling though, and we aren't sure about picks like this given where we are in the cycle. Latest Earnings Sales evolution (H1 Pres) Volumes were mainly a little soft except for Asia and the Middle East, with headline growth being supported by bolt-on acquisitions, but the company is focusing on value and cost efficiency. In general, the focus on marginality and value is being emphasized for these markets because there is a tendency for competitors to chase share. Other markets tend to be more disciplined. There are also significant capacity increases coming in India from domestic players, likely to increase overall cement production globally by 25% over the next 6 years. Holcim isn't really present in these markets due to structural challenges to competition, but while not entirely integrated, capacity in other markets does present somewhat of a pricing threat. This year's outlook is good, but secular supply growth is a concern. Furthermore, import dynamics could be a threat as Chinese cement demand falls and cement production capacity could be turned towards supplying foreign markets. EBIT Evolution (H1 Pres) While some EBIT growth comes down to execution and discretionary action on the fixed cost base, the majority is the consequence of falling freight and electricity costs YoY. Electricity and fuel together are around 30-40% of the COGS, and freight is probably around 20-30% of COGS. The majority of COGS comes down to these two factors, and both are down considerably. Volumes are down for logistic players, and freight rates are generally under pressure as a consequence. Electricity prices have been falling from higher average levels in 2023, though 2022 was the year of peak fuel and electricity prices. Correlated to electricity, oil, and other fuel prices were also down YoY when looking at the Brent (CO1:COM). Headline IS (H1 PR) The decline in COGS is considerably more than that of sales and is the majority of the cost base overall. That has been driving the solid EBIT performance. Bottom Line Performance has been relatively good as of late. However, we worry largely about the commodified nature of the Holcim AG business, its cyclicality, and that there is significant capacity coming online globally over the next 6 years and an import threat from China that could impact Holcim markets. As a commodity, supply increases overseas should be of some concern, particularly as capacity in major Holcim markets like Europe and NA is not growing, with most producers focusing on reducing emissions and costs. We are also not sure how durable the decreases in energy prices are, as there are still ways for energy supply chains to be disrupted. For example, by repeated drought issues in key canals and escalating conflicts in the Middle East. The main downsides to oil and fuels are the supply cuts being phased out starting this year and the fact that there is a demand pressure in oil markets, which are positives for the Holcim bottom line. The other matter is whether Holcim is even the best value within the space of cement, concrete, and other additives. Heidelberg Materials AG (OTCPK:HDELY) trades cheaper, and there are other smaller-scale cement businesses listed on European markets like Vicat S.A. (OTCPK:SDCVF) whose forward P/Es are considerably lower than Holcim's. Holcim is around 13x in forward P/E, compared to above 8x for Heidelberg Materials. I do not see a special reason to move on this.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2459182549"}