HLBZF - HeidelbergCement Vs. Holcim: A Clear Winner

Summary

• We provide a comps analysis between Holcim Ltd and HeidelbergCement AG.
• Holcim's multiple arbitrage opportunity is providing a clear upside.
• In Q4, Heidelberg delivered a solid set of numbers. The dividend was confirmed, and so we did our valuation.

Last week, HeidelbergCement AG ([[HDELY]], [[HLBZF]]) ("Heidelberg") disclosed its Q4 and Fiscal Year 2022 numbers. Here at the Lab, we already commented on Holcim Ltd's ([[HCMLF]], [[HCMLY]]) latest accounts , and we could not forget to analyze our favorite German player Heidelberg. In 2022, looking back to our initiation of HeidelbergCement AG coverage in our article called The Best Is Yet To Come , we provided a price target of €70 per share. We were positively impressed with the Heidelberg DPS increase of 9%.

After a year of holding, we are now more inclined toward Holcim investments. This is due to: 1) a better performance in portfolio optimization thanks also to the ongoing roofing acquisitions with our Multiple Arbitrage Opportunity analysis; 2) a lower debt compared to Heidelberg; and 3) a new share repurchase announcement coupled with an increase in the dividend.

Today, we are not commenting on Heidelberg's latest accounts, but we instead provide a comps analysis with Holcim.

1. The German player delivered a Q4 operating EBITDA of €1 billion and was up by 4.3% on a yearly basis, signed a plus 2.5% of Wall Street collected consensus at €996 million. Thanks to higher selling price, the company managed to deliver top-line sales of €5.29 billion, with a plus 12.0% on a year-on-year comparison; however, the EBITDA margin decreased by 143 basis points to 19.3% on a persistent raw material inflationary pressure. Despite that, Q4 EBITDA was a beat thanks to the positive pricing delta of €129 million (first time in 2022 - Fig 1) and favorable FX evolution of €23 million (Fig 1). At the aggregate level, the Fiscal Year EBITDA was down by 3.5% on a yearly basis to €3.73 billion (and was above consensus). While Holcim's EBITDA was flat, the core and recurring EBIT signed a plus 7.2%, whereas Heidelberg's EBIT decreased by 6%;
2. The German player delivered a mixed regional performance with positive results in North America and Asia, whilst Southern & Western Europe and Africa-Med were fractionally lower than expectations. Margins contracted across all regions and the African region delivered the biggest decline with a minus 928 basis points. In the ongoing portfolio reshaping, Holcim sold its businesses in Zimbabwe, Brazil, and India, and is advancing on cement and ready-mix disinvestments with a solid liquidation value. In detail, the total enterprise values reached almost CHF 9 billion, and the Indian company was sold at an EV/EBITDA multiple of more than 14.5x. These net proceeds will materially lower Holcim's FX evolution and earnings. While Heidelberg is optimizing its portfolio still in the cement and ready-mix solutions (Fig 2), Holcim is moving on with its Solutions & Products division and announced a second strategic acquisition. After the North American market leader called Firestone, it was time to acquire Duro-Last , a German provider of roofing. Holcim is now positioned to be an integrated construction player (and not a material company);
3. Regarding the debt analysis, Holcim again looks safer than Heidelberg. The former reached a record-low net leverage ratio at 0.9x, while the latter delivered a net debt/EBITDA of 1.48x;
4. Related to point 3), Holcim announced a DPS increase of 14% to CHF 2.50 and also a new share buyback program, with a maximum amount of up to 40 million shares or CHF 2 billion in 2023. Heidelberg's dividend was left unchanged on a yearly comparison;
5. Heidelberg's order backlog looks solid; however, the non-residential sector is expected to partially offset the weaker residential markets. The company is expecting further growth in revenue and operating EBIT (see Fig 3).
6. Based on the company's guidance, EBITDA should reach €3.6 billion in 2023. Considering Heidelberg's higher debt (at now €5.5 billion) and still applying a 5.5x on the EV/EBITDA estimates, we still confirmed our €70 buy rating ($14.5 in ADR). As already mentioned, we believe that Holcim offers a better stock price appreciation coupled with a higher dividend yield (4.32% vs 3.69%). We are now more cautious about Heidelberg's operational improvements compared to our peers.

Risks to our price target include changes in the end market as well as commodity prices. There are more FX risks in Heidelberg vs. Holcim.

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