Description

Vicat is a mid-sized global cement, aggregates and ready-mix concrete operator active in 12 countries: France, US, Brazil, Italy, Switzerland, Turkey, Egypt, India, Kazakhstan, Mali, Mauritania, and Senegal. France is 31% of sales while the US is 19%. Sales are 60% DM, 40% EM. 

Larger peers have been written up recently on VIC. I’ll assume you have a basic understanding of the cement/aggregates business model. As a small cap, family controlled French company, Vicat has always traded at a discount to its European peers. Over the five-year period 2019-2023 Vicat traded at an average 18% EV/EBITDA discount to an equally weighted basket of Heidelberg Materials, Holcim, CRH and Buzzi.

But over the last 24 months that discount has gapped from 0% to 40%:

During this time the peer basket re-rated 2-turns from 4.9x EV/EBITDA to 6.9x while Vicat derated from 4.9x to 4.1x. Holcim and CRH experienced the strongest re-ratings but even Heidelberg and Buzzi are up:

On numerous valuation metrics, Vicat’s equity is as cheap as it’s ever been, with a balance sheet that is currently fine and 12 months away from being  underleveraged.

• €1.4bn market cap + €1.4bn YE24 net financial debt = €2.8bn EV

• Vicat generates €4bn of sales, €775m EBITDA and €300m normalized LFCF 

• Currently trading at 3.6x EV/EBITDA, the lowest it’s ever been ex-2008

• Most compellingly, the LFCF yield on FY25 estimates is >20% 

• The business will be <1.7x levered at YE24 and getting to <1.3x by YE25 it a top goal

FCF has been suppressed for several years due to large growth/upgrade capex projects. These have just ended (discussed below).

Even cheaper than it looks

On a SOTP basis, Vicat’s non-US operations trade for 2.4x EV/EBITDA:

• The US is 19% of group sales and 23% of group EBITDA

• The US will generate ~€175m of EBITDA this year

• Value that at 8x for €1.4bn of EV, 50% of Vicat's current group EV of €2.8bn

• The non-US businesses will generate ~€580m of EBITDA and are collectively being valued at 2.4x EV/EBITDA

Larger peers have suffered the same SOTP valuation discount when comparing their US vs. non-US businesses. In recent years several have executed corporate actions designed to close the gap. CRH has re-listed to the US; Holcim is spinning its US business in 1H25; Titan is listing its US subsidiary; and Heidelberg has announced that it is actively pursuing strategic options to unlock the value of its US assets.

Vicat is too small to pursue those strategies and is extremely unlikely to sell its California or Alabama plants. We should assume the family are permanent owners. The company could try to draw more attention to the US business through better disclosures. Currently the US gets lumped in with Brazil as part of the Americas division (75% US, 25% Brazil).

Additionally, it’s tempting to think about the family taking the business private. The balance sheet could finance a levered MBO with <1.0x turn of debt. The family last bought shares in 2008 when Heidelberg sold its 13% stake to help fund its acquisition of Hanson. The 1H24 conference call included this amusing exchange between a sell-side analyst and the CFO:

Analyst: When I see Holcim’s valuation of the US company, or at least what they expect to get or what they are getting in the US market, which is bigger than France for you, you get everything else for free. So, as a family, why don’t you get this, and say “I have a flat in Paris, but who cares?” Doesn’t this trigger something in your head?

CFO: We usually don't comment on the stock price. Indeed, we share the opinion that the value is low. Now the answer is probably more in your hands than in mine. [We] believe that deleveraging the company and focusing on improving the return on capital will at the end catch the attention of the market.

Analyst: I hope you're right. The answer is more in the hands of the family because they bought at EUR 86 [from] Heidelberg. So, hopefully they may have a view, which will be interesting.

I don’t want to stretch reality. The base case is that the family does nothing, continues clipping their >6% dividend and ignores the share price. But the conceptual potential for a buy-in exists.

Should Vicat trade at <4x EV/EBITDA?

The obvious question is why, as peer valuations have rerated higher, has Vicat’s valuation declined to record lows? Here are some possible explanations:

1. Family controlled. The Vicat family (~200 people) are permanent owners with a reputation for conservative capital allocation. They gold plate their facilities and have a long-term strategy of expanding into new markets with mixed results. They value the dividend (never cut) and can’t pursue aggressive buybacks given their 63% ownership. A take-private by the family is possible but unlikely.

2. EU-focused. 41% of sales are in Europe, including 31% in France. These are arguably low-growth markets with regulatory headwinds around CO2 emissions (more on that below).

3. Global but still concentrated. Being in 12 markets is concentrated enough that an issue in one market can materially impact group earnings. This has historically played out, with problems in Egypt, Turkey, Kazakhstan and India all affecting the group at various points in the past.

4. Relatively higher leverage and lower FCF. In recent years most peers have aggressively de-levered to below 1.5x ND/EBITDA. Vicat has reduced its debt as well, but at a slower pace. They guide to end 2024 at <1.7x, which is fine, but weak vs. peers. Cash generation has been directed towards large capex programs for the last 3 years.

Catalyst: FCF inflection

For the last 3 years Vicat has undergone a major capex upgrade cycle that has depressed free cash available to equity. They replaced an expensive kiln in Alabama and installed a new kiln in Senegal. Both upgrades are now done, with Alabama operational as of this year and Senegal’s investment completed in 1H24 and scheduled to be commissioned before YE24.

• 2022 capex = €422m (11.5% of sales)

• 2023 capex = €330m (8.3% of sales)

• 1H24 capex = €186m (9.6% of sales)

• 2H24 guide = €139m (6.9% of sales)

After years of elevated capex, Vicat is about to deliver materially higher after-capex cash to equity holders. This will drive leverage to the guided goal of <1.3x in FY25, something mgmt point to as their absolute top priority.

CFO at the 1H24 call: “Regarding the post-'25 capital allocation, it's probably too early to be very specific on that. We would like to reiterate that our priority is to deleverage and we will stick to that.”

As leverage approaches 1.3x and then 1.0x, Vicat at current prices will offer a >20% levered FCF yield, the strong possibility of a dividend raise, and increasingly attractive economics aroud a family bid for the whole company. Less excitingly, the potential for M&A into a new market also exists. Dilutive expansionary M&A is probably the biggest risk to Vicat equity holders today.

The carbon angle

European industrial firms operate under a cap-and-trade emissions scheme called the European Trading Scheme (ETS). We are currently in Phase 4 of the ETS, with free allowances declining annually. Most firms are already in a credit deficit, forcing them to reduce emissions or buy credits on the open market. Heidelberg Materials and Holcim have spoken openly about how this dynamic is driving up the price of cement in Europe. Efficient producers stand to benefit, capturing the spread between cement market prices and their own below-average CO2 emissions.

Vicat is not a leader in CO2 reduction within the cement industry. Its 575 kg of CO2 per ton of cement ranks poorly versus larger EU peers (i.e. Heidelberg at 534kg/ton with a goal of 400kg/ton by 2030). Vicat’s goal is to reduce emissions to 497 kg/ton by 2030, including 430 kg/ton within Europe. It has earmarked EUR 800m of CO2-related capex spread over a decade, focused on “traditional” carbon-reducing efforts like reducing the clinker-ratio and increasing use of alternative fuels and renewable power. Ultimately, to be carbon-zero by 2050, the cement industry will need to implement carbon-capture and storage technologies. Heidelberg and Holcim are pioneering these efforts, which remains in an experimental phase with material subsidies from government sponsors. Smaller players like Vicat are betting that the implementation costs of carbon-capture will decline exponentially over the next 2 decades.

One thing Vicat does have going for it is a large stockpile of carbon credits, worth EUR 300m at current market prices, or ~22% of the market cap. Most peers are already in deficit, but Vicat has enough excess credits on its balance sheet to last it through 2030. This is not a permanent solution to the carbon issue, but it will support margins in the years ahead.

Bottom Line

On FY26 estimates, Vicat today trades at 5.5x earnings and 3.0x EV/EBITDA, with a 22% FCF yield. By comparison, Heidelberg Materials, a much larger and more globally diversified peer that is similarly considered cheap within the sector, trades at 7x earnings and 5x EV/EBITDA, with a 12% FCF yield.

Vicat deserves to trade at a discount, but in recent months that discount has widened for no particular reason. Additionally, while the EV/EBITDA valuation is already historically cheap, the levered FCF yield to equity is about to inflect after years of being optically low due to major R&M capex. With 63% family ownership, minority shareholders shouldn’t expect aggressive corporate actions to address the valuation, but equally you should expect the business to be conservatively run. The dividend, currently a 6.6% yield, will never be cut and could be increased going into 2025. France, Vicat’s largest single market, is currently depressed (sales -6% in 1H24 on weak volumes) but is structurally underserved for infrastructure and housing, setting-up well for the long-term. And while a divestiture of the US assets is unlikely, a sale of the Indian business at a silly multiple to a local competitor isn’t off the table.

The risk/reward profile of Vicat appears very compelling. Downside is protected by the cash generation and de-leveraging strategy over the next 12 months, which will only further highlight the equity’s cheapness. Holders get paid a >6% dividend while they wait for a the cash generation to force a rerating. The primary risk seems to be poor capital allocation into a new market over the next 1-3 years, and cyclical demand risks across its 12 markets.

Catalyst

- clear demonstration of cash inflection following the elevated capex of recent years. Dividend could be increased and leverage will decline rapidly over the next 12 months.