Description

For those willing to look internationally, this is an opportunity to buy a valuable, though small, business at a steep discount to public- and private-market value.

At the current quote of 2.60 euros, this pure-play cement company trades at $40 per ton of capacity, 4.5x EBIT, 3x EBITDA, 90% of sales, 8x earnings, 14% free cash flow yield, and has a 2% dividend yield. The company’s market cap of 400 million euros compares with 150 million euro of adjusted net cash, and near-term earnings are expected to at least be stable, with the likelihood of an improving trend in the future.

Cementir is the fourth-largest Italian cement company, with a 7% national market share and has a number-two 20% share in its primary southern-Italy market. Competitors include Italcementi with 30% national share, Buzzi Unichem with 18% share, and Colacem with 13% share. The former two are listed. The company also operates in Turkey, having purchased Cimentas in 2001. Cimentas has roughly 30% share of the Aegean region, and is Turkey’s third-largest exporter with 14% share. Cimentas and its subsidiary Cimbeton still have stubs trading on the Turkish exchange.

The Italian cement market is among the largest in Europe. Its 21% share of EU consumption (before the recent 10-country expansion) has remained relatively stable over the past decade and is second only to Spain’s, which represents 23% of EU consumption. The EU market is a bit less than 190mn tons, having peaked at 196mn tons in 2000 and previously troughed at 165mn tons in 1993, after a particularly difficult recession.

The Turkish market is highly export-driven, second only to Thailand in terms of export volume. Turkey is the 7th largest worldwide producer, compared to Italy’s 8th position.

Cementir is 88%-owned by the Caltagirone family, 84% of which is held directly. In Italy especially, it is important to spend due diligence time on the family. In searching through Italian newspapers for the past two decades and from speaking with various contacts, I have no reason to believe that the family is engaged in any untoward activities. The only serious instance that I came across was in the early 1990s when the senior Caltagirone was accused (and then acquitted) in a bribery scandal that engulfed all of Italy’s business community. In the meantime, the family has proven adept at efficiently operating a wide variety of businesses. For example, they purchased and turned around the newspapers in Caltagirone Editore (listed), lifting EBITDA margins from 5% to the high 20% range in just a few short years.

Cementir operates 9 kilns & 14 mills. It operates close to its 4.3mn ton capacity. Cement represents 90% of its revenues, while concrete rounds out the remainder. The company’s Italian operations are 2/3rd of the total, and are primarily domestically sourced.

Cementir’s Turkish sales represented 1/3rd of total 2003 sales, almost half of which was sourced from the export side. In other words, domestic Turkish demand accounted for just 1/4th of Cementir’s sales.

Prior to the Turkish acquisition, Cementir had successfully increased operating efficiency, resulting in massive improvements in margins and productivity. Though a strong economy no doubt helped, the company did not fall into the usual trap of lavish spending and benefit inflation, which has allowed it to cushion itself from the decline in volumes since 2000. EBIT has been roughly flat at around 50mn euros. In fact, the only reason margins declined after 2001 (from a peak of 35% EBITDA to 30% EBITDA) was due to the acquisition of the poorly performing Turkish business, but even that business is showing signs of improvement.

The Turkish business is improving for two reasons: internal cost rationalization, and a pick-up in global cement prices. With Turkish cement prices at the very low end of the global scale, and EBIT margins at very low levels, small price increases can quickly translate into earnings surprises (the good kind).

Finally, to help focus on the degree of undervaluation, a few words on private market transactions. This is a relatively active market for M&A and, though prices vary depending on region and country, it is interesting to note the EV/ton in Europe since 1995 have averaged $186. Even in Italy, in 1995/1996, there were some transactions involving Holcim and Lafarge at nearly $200 per ton, and remember this was near the trough of the cycle. North American transactions have averaged nearly $250 per ton, the high end. Southeast Asian multiples have averaged $100 per ton, while Indian transactions have averaged $70, with a January 2004 transaction valued at over $150. Finally, African values have averaged $140 per ton.

Though I am not arguing that Cementir is a quadruple, I am saying that the current multiple of $40 per ton probably seems to discount all know and unknown risks. For what it’s worth $120 per ton for Italy and $70 for Turkey still leads to a 5-euro price.

In sum, because of its size and limited float, you have the opportunity to purchase a stable, well-run company in an attractive industry at a steep discount to private- and public-market values. In the meantime, the dividend yield, likely to increase over time, pays you while you wait.

Catalyst

Sorry, no clue.