Fitch Affirms Cementos Pacasmayo S.A.A. at 'BBB-'; Outlook Stable
08/01/2016 21:15
(The following statement was released by the rating agency) CHICAGO, January 08 (Fitch) Fitch Ratings has affirmed the ratings of Cementos Pacasmayo S.A.A. (Pacasmayo) at 'BBB-'. The Rating Outlook remains Stable. The ratings reflect the company's solid business position as the only cement producer in Peru's northern region. This position has resulted in high margins, low leverage and solid liquidity. The small size of the cement market in the north, as well as the logistical challenges found in this region, has limited the impact of imports and the probability a global company will enter the region in the near future. Further factored into the ratings is the completion of Pacasmayo's new cement plant in Piura and the favorable outlook for Peru's cement industry over the medium term driven by Peru's positive macroeconomic and business environment. KEY RATING DRIVERS Solid Business Position: Pacasmayo is the dominant player in Peru's northern region, where it provides essentially all of the cement sold. During the LTM period ended September 2015 the company sold 2.3 million metric tons, maintaining its historical market share of approximately 22%. The market structure of the Peruvian cement industry has remained stable for more than a decade, which lowers business risk and provides sector stability. Pacasmayo's low-cost production and extensive distribution network, which is customized to the specificities of the Peruvian cement market, give the company strong competitive advantages and barriers to entry. Completion of the Piura Cement Plant: Pacasmayo announced the completion of its new Piura cement plant, which began operating during the end of third quarter 2015. Total plant capacity is 1.6 million metrics tons of cement and 1 million metric tons of clinker. Advantages of the new Piura plant include elimination of the need to import clinker for cement production, which should reduce cost of goods sold and improve EBITDA margins by approximately 300bps. Further, the location of the plant provides Pacasmayo with greater logistical flexibility in meeting the demands from different regions of Northern Peru. The total cost of the project was USD365 million, and was approximately USD20 million under budget. Weakened Liquidity Expected to Rebound: Pacasmayo's cash position declined to USD126 million as of Sept. 30, 2015 compared to USD192 million at Dec. 31, 2014 due to the funding of its new plant. Fitch expects Pacasmayo will end 2015 with a cash balance of around USD50 million mainly due to dividends paid of approximately USD50 million and stock repurchases of about USD32 million during October 2015. Pacasmayo is expected to return to positive free cash flow (FCF) generation, replenishing its cash balances to approximately USD60 million by 2016 and USD90 million by 2017. The company has no short-term debt, with its USD300 million notes not maturing until 2023. Expanding Margins: EBITDA margins improved to 32.6% for LTM September 2015 compared to 27.3% for the prior year period due to a reduction in imported clinker for its cement production coupled with a reduction in administrative expenses. Key factors in sustaining its high margins are access to low-cost energy, proximity of cement plants to limestone reserves, extensive and well-developed distribution network, and a favorable sales mix of bagged (89% of sales) to bulk (11% of sales) cement. Pacasmayo's new Piura plant is expected to drive an additional 300bps in EBITDA margin improvement as the new plant will eliminate the need for Pacasmayo to import clinker, coupled with the state of the art technology and production efficiencies. The kilns at the new plant will be able to work with different types of fuels (municipal solid waste, biomass, shredded tires, etc.), has its own quarry, and will lower transportation costs for imported raw materials with its proximity to a port. Return to Positive FCF Generation and Improved Leverage Metrics: Fitch expects Pacasmayo to return to positive FCF generation during 2016 due to steady growth in operating cash flow coupled with a significant reduction in capex. Fitch projects FCF to be approximately negative USD100 million for 2015, which, excluding the company's Piura plant project, would have been around positive USD20 million. Following the completion of the Piura plant, Fitch projects FCF to be USD36 million in 2016 and USD60 million in 2017. Pacasmayo's net leverage ratio is projected to improve during 2016 and 2017 as higher EBITDA generation coupled with lower capex, reduced working capital, and lower dividends will restore cash balances. Fitch projects Pacasmayo's net leverage to fall to 1.6x in 2016 and around 1.3x by 2017. Favorable Cement Industry Fundamentals: Fitch projects Peruvian cement consumption will increase by 2.5% in 2016 due to increased demand from self-construction and recovery in public/private sector markets. Peru has USD40 billion of private investment projects expected to be developed during 2016-2017, but they could be delayed by weaker investor confidence in the period before the upcoming presidential election. While a severe El Nino would temporarily delay new projects in northern Peru, cement volumes would benefit from potential reconstruction projects. KEY ASSUMPTIONS --Cement volumes decline 2.5% during 2015 and rebound modestly to 1.0% in 2016, and 4.5% in 2017. --Price increases remain in line with inflation. --EBITDA margin to improve to 34% in 2016 due to completion of new plant and reduced imported clinker. --Capex to decline significantly to around maintenance levels. RATING SENSITIVITIES A positive rating action is unlikely over the near term given Pacasmayo's recent conclusion of its capex program coupled with the need to reduce leverage and rebuild its cash balances. Pacasmayo's rating or Outlook could be negatively affected by an inability to improve its weakened liquidity position following the completion of its new cement plant or a failure to reduce net leverage to below 1.5x by 2017. Fitch would view sustained high levels of dividends or additional share repurchase programs during a period of low liquidity negatively. LIQUIDITY Liquidity is expected to decline to approximately USD45-USD50 million of cash on hand as of Dec. 31, 2015 from USD120 million as of Sept. 30, 2015 due to the aforementioned expenditures related to the new cement plant during the year, coupled with the announcement of a S/0.28 per common and investment share cash dividend, and the repurchase of its own shares of approximately USD32 million. Total dividends paid during 2015 are expected to be USD50 million compared to USD41 million in 2014 and USD21 million in 2013. The increase in dividends over the last two years represents cash freed up from the completion of the Piura cement plant project, which came in slightly under budget and well within its deadline. Approximately 40% of Pacasmayo's cash is denominated in USD. All of Pacasmayo's debt outstanding is related to its bond issuance from 2013, which matures in February 2023. Pacasmayo has a cross-currency swap contract for its USD300 million denominated debt on the principal. Fitch affirms the following ratings: Cementos Pacasmayo S.A.A. --Foreign currency long-term Issuer Default Rating (IDR) at 'BBB-'; --Local currency long-term IDR at 'BBB-'; --Senior unsecured USD300 million notes due 2023 at 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Phillip Wrenn Associate Director +1-312-368-2075 phillip.wrenn@fitchratings.com Fitch Ratings, Inc. 70 W. Madison Chicago, IL 60602 Secondary Analyst Josseline Jenssen Director 00 511-372 0681 Committee Chairperson Joe Bormann, CFA Managing Director +1-312-368-3349 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com. 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