Holcim Philippines (HLCM PM)

Holcim Philippines (HLCM PM) is the largest cement producer in the Philippines. It owns 4 cement plants in the country, together with grinding mills, distribution terminals and related assets.

The company is a subsidiary of the world’s largest cement company in the world - Switzerland-based Holcim. It, therefore, enjoys access to the parent’s technological know-how and access to talent from the broader Holcim organisation.

Value investors love cement stocks. They perceive cement companies to enjoy local monopolies, arising from the fact that cement is expensive to transport relative to its value. They tend to be cash flow generative. On the other hand, cement companies are cyclical and overcapacity can persist for decades.

The Philippine cement market is in an early stage of development. The fact that cement consumption in the Philippines is only 320kg/capita suggests that volume growth will continue for many years ahead. The country’s demographics are excellent and the commodity property sector is still in its infancy.

It’s a high-quality operation. Holcim Philippines itself has been a highly profitable business with a return on equity well above 20% historically, despite its clean balance sheet. Dividend payments have been generous at an 80% median pay-out ratio, few related party transactions and zero shareholder dilution.

The Philippine cement market has been weak since 2016, due to a combination of competition from Vietnamese imports, too-aggressive capacity increases and a property slump related to COVID-19.

If gross margins return to 23% at some point, the 2025e P/E ratio could end up at around 6.4x. This number is significantly lower than the historical median P/E ratio of 16x. At an 80% dividend payout ratio, that would imply a dividend yield of 13%.

But even today, Holcim Philippines generates close to a free cash flow yield of 10% and a dividend yield of 8%.

Another kicker is the fact that the parent Holcim is trying to sell Holcim Philippines. In 2018, Holcim sold its other subsidiary Holcim Indonesia for 18x EBTIDA. If you apply such a transaction multiple on Holcim Philippines’ current EBITDA, that would imply a stock price of PHP 17/share.

The main risks are weaker infrastructure spending following the Presidential election in May 2022 and potential removal of import duties on Vietnamese cement products in October 2022.

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