Description

Corporación Moctezuma is a main player in the Mexican construction industry, through the production, sales and distribution of portland cement, pre-mixed concrete, sand and gravel.

They sell their products under the brands "Cementos Moctezuma" and "Concretos Moctezuma". The company has 3 plants, located in Tepetzingo, Cerritos and Apazapan, with a combined installed capacity of 6.4 million tonnes.

The thesis here is quite simple: This company is ran by a great management team, has a solid (low-churn) investor base, a history of consistent and growing profitability, operating in a very structured, quasi-olipolistic market which is the Mexican cement industry.

We believe this to be a classic case of a great company, ran by a management team whose interests are aligned to ours (ROIC is a key metric for management compensation), that should compound earnings at an 8% rate for the next five years. Valuation is neither cheap or dear but the quality of its business could justify multilple expansion (it trades at a 30% discount to peak multiples) which should result in a 12% plus dividends (total 17%), compounding investment for the next five years. 

It's stock is fairly iliquid and rarely covered (only one analyst on the sell side with credible, consistent coverage), even though it has a 2.9bn USD market capitalization. Thus the discount versus its most comparable peers.

Let's begin with some history on the company:

The company was founded in 1982 by Fratello Buzzi (now Buzzi Unicem SpA), mexican company Coconal and Mr. Óscar Alvarado when they acquired Cementos Portland Moctezuma, whose origins trace back to 1943 when the first plant was built in the state of Morelos.

Part of its growth has been through acquisitions- In 1987 CMoctezuma acquired Latinoamericana de Concretos. In 1988 the spanish company, Cementos Molins, invested in Moctezuma and they consolidated operations from cement and concrete in Corporación Moctezuma, which listed itself that year.

Capacity has grown in a moderate but consistent pace, in 1997 the Tepetzingo plant started operations with an installed capacity of 1.25 million tonnes of cement, three years later a second production line was inagurated, with these production enhancements  the plant had an installed capacity of 2.5 million tonnes of cement and 600 thousand m? of concrete. In 2004 the Cerritos plant started operations, with an installed capacity of 1.3 million tonnes of cement. The plant had a cost of $151 million dollars. Two years later they doubled the installed capacity of the Cerritos plant. It was in 2007 when the company began its accelerated growth phase, when the Board approved the construction of a third plant in Apazapan, in the state of Veracruz with an estimated inversion of $265 million dollars. The plant in Apazapan started operation in 2011.

Even though the company only sells its products in Mexico, in 2011 they exported nearly 5 thousand tonnes of cement to Brazil, taking advantage of the proximity of its Apazapan plant to the port of Veracruz and higher cement prices in Brazil. Sales in Brazil were not relevant as the amount sold totaled  $4.8 million pesos, yet it was the first time the company sold their products in other markets. The company intends to continue focusing its operations in Mexico, and only export when conditions are favorable. It is a pure play in Mexico.

In 2012 the company through the 50-50 JV of its subsidiary Latinoamericana de Concreto with CYM Infraestructura, ventured in the toll road infrastructure business, placing the hydraulic concrete platform for the Libramiento Sur in Guadalajara in February this year. This project alone implies supplying over 1 million of m? of concrete and 400 thousand tonnes of cement.

Since 2011 the Company started a process of corporative simplification, by 2012 they had 4 less subsidiaries than in 2010.

Despite enjoying long standing relations with the institutional construction sector, and a pristine reputation, Corporación Moctezuma has a pulverized client base. In Mexico the self construction sector is quite important, the company has taken advantage of that situation by establishing business relations with several distributors through bulk sale.

The company is vertically integrated, as it has mines that can supply over 100 years of material for cement production.

Being energy costs of great relevance in the cement industry, the Company has shifted its focus to producing cement with low energy consumption. This has been partially achieved by switching to low energy consuming grinding mills and in the year 2004 they began switching from fueloil to petcoke, this measure translated in energy costs reducing 60%. In 2012 the Board approved the construction of a 14.1 km shale gas pipeline for its Apazapan plant, which will be finished in 2014, this measure will allow the company to further reduce costs.

Corporación Moctezuma sells products that comply with international standards of quality, specifically cement and concrete. 

The company in the concrete sector complies with the following norms

• Current Mexican Norms
• American Society for Testing and Material
• American Concrete Institute

The cement products are sold in three presentations: 25 kg bags, 50 kg bags and 2 tonnes bags (Big Bag).The Tepetzingo plant has received the SICMAS certification under the norms ISO 9001:2008, ISO 14000:2004 and OHSAS 18001:2007. The concrete division has 18 plants that have received certification under the ISO 9001:2008.

Moctezuma sells several kinds of concrete such as:

• Class 1
• Class 2
• Specials
• Other services
• Other products

In 2012 the Concrete division participated in important infrastructure projects such as: Planta de Tratamiento de Aguas Negras in Atotonilco, Torre BBVA Bancomer, Segundo Piso de Periférico in Mexico City, Super Via Poniente in Mexico City and Puerto Martítimo de Altamira in Tamaulipas.

The profound understanding of the Mexican market, their excellent relations with distributors and their focusing on the self construction industry have payed outstanding results to the Company, revenues have grown steadily, with attractive margins  and maintaining profitability. The Company has reported profit every year.

Construction is utterly related to economic cycles, constructors being the customers of the company make Moctezuma quite dependent of economic cycles. Brilliant management has been able to maintain growth despite deceleration and decreases in GDP and construction GDP.

None of the company´s clients represent more than 10% of its total sales. In the Concrete division the company has 622 clients, in the Cement division the client base consists of 632 clients. Since many of their clients are distributors, the number is much bigger. The Cement division has presence in 29 out of 32 states in Mexico, and the Concrete division has presence in 17 states.

The cement and concrete industry in Mexico has few participants, all of them large companies. The main competitors of the company are Cemex, Holcim Apasco, Lafarge, Cementos Chihuahua, Cruz Azul. Only Cemex and Holcim Apasco have national coverage, the rest only have regional coverage. Another competitor called  Cementos Fortaleza started operations in 4Q12. The company estimates its market share in 2012 for the Cement division was 14.3% and in the Concrete division 7.5%

Comparable Valuation

Financials..

Valuation

Corporación Moctezuma trades at roughly 12x earnings. It has a net cash position and we believe FCFF should be in an up-cycle given the reduction in Capital expeditures that the company will see in 2013 and 2014. 

Our model assumes 8% revenue growth and 11% operating profit growth for 2013-2018.

On a DCF basis, using a WACC of 7.4% and a terminal growth rate of 3.5%, we believe the company should be valued at $57 pesos per share, implying around 55% upside from current prices.

We believe downside to be limited due to it's 5% dividend (which we deem sustainable), and net cash position.

Catalyst