Fitch Ratings has affirmed Cementos Progreso SA's (Cempro) Issuer Default Ratings (IDRs) at 'BB+'. The Rating Outlook is Stable.
Cempro's 'BB+' ratings reflect the company's leading position in Guatemala's cement industry. Its solid market position is viewed as sustainable considering the country's limited infrastructure and challenging logistics, which limit imports and significantly increase cement distribution costs. Further deterrents include the company's extensive distribution network and its focus on operational efficiency, which have resulted in a low cost structure.
The ratings are limited by the company's negative projected free cash flow (FCF) for 2015-2016 due to high expansion capex. The high proportion of foreign currency debt relative to the company's predominantly local currency revenues is also a concern. Guatemala's country ceiling of 'BB+' does not restrict the company's ratings, as Cempro's local currency rating is 'BB+'.
The Stable Outlook reflects Fitch's view that the company will sustain core operating cash flow during its current investment cycle that should result in net debt/EBITDA leverage levels below 3.0x.
Key ratings drivers
Dominant market position
Cempro has a leading position in Guatemala's cement industry. In terms of volume sold, its market share has remained stable since 2007 at about 83 per cent. The company is the only producer with fully integrated operations. Its only domestic competitor is Cemex LatAm Holdings (Cemex), which produces and sells cement and related materials such as ready-mix concrete.
Cempro's solid market position is supported by its retail network of independent distributors that allows the company to serve its highly fragmented consumer base. Of 500 distributors in Guatemala, 450 are exclusive Cempro distributors. Cement, which represents 73 per cent of the company's portfolio, is sold primarily (68 per cent) for self-construction and is supplied to this segment as bagged cement.
Strategic focus supports profitability
The company's strategic focus on operational efficiency has contributed to Cempro maintaining the highest EBITDA margins among public industry peers. Cempro's EBITDA margin during the latest 12 months as of 30 June 30 2015 was 39.8 per cent.
The ratings include Fitch's expectation that Cempro's EBITDA margins will remain above 37 per cent and will likely strengthen in the long-term due to distribution efficiencies from the new cement plant that is scheduled to begin operations in 2017. Cempro's new plant in San Gabriel will increase its cement production capacity by about 70 per cent.
Negative FCF during 2015-2016
Cempro's total capex, excluding capitalized interest for 2015-2017, is expected to be around US$500m as the company completes its US$807m multi-year investment plan for the construction of its San Gabriel cement plant. Fitch estimates that expansion capex and dividends of about US$30-40m per year will result in Cempro generating negative FCF of about US$140m in 2015 and US$50m in 2016 and positive US$50m in 2017. Post expansion positive FCF should be supportive of long-term deleveraging.
Debt structure
The company's total debt as of 30 June 2015 was US$535m, 75 per cent of which was denominated in US dollars. Although there is a risk that the company could face difficulties repaying foreign currency debt considering its predominantly Guatemalan quetzales revenue, Fitch believes the likelihood of significant depreciation of the local currency is low due to high levels of remittances from workers abroad (predominantly in the US) which support the country's foreign currency inflows.
Leverage expected to peak in 2016
Cempro's gross (total debt/EBITDA) and net (net debt/EBITDA) leverage were 2.3x and 2.1x as of 30 June 2015, below the 2.6x and 2.2x registered at year-end 2014. As a result of the additional debt required to fund construction of the new plant, Cempro's gross and net leverage are anticipated to increase to 2.7x and 2.6x in 2015 and to 2.8x and 2.7x in 2016, respectively. Gross leverage is expected to decline to year-end 2014 levels by 2017, and trend toward a range of 1-2x in the following years.
Country constraints
The company's performance is dependent upon continued stability and economic development in Guatemala. Fitch expects Cempro's operations to maintain annual growth rates in the 3-5 per cent range, which is in line with projected GDP growth in Guatemala. Growth expectations are supported by moderate expected economic growth and Guatemala's housing deficit of approximately 1.4 million homes. Investments in infrastructure should also result in high demand for cement.
