2023-08-14 12:27:34 ET
Summary
- Heidelberg Materials' Q2 results exceeded Wall Street analyst expectations, with top-line sales reaching €10.47 billion and a core operating profit increase of 37.5%.
- The company completed its second share buyback tranche for €346 million and increased its yearly guidance.
- Here at the Lab, we are concerned about a potential real estate construction sector slowdown. Following higher guidance, we increased our target price, maintaining a neutral rating.
Following our update on Holcim called " Less Optimism About Real Estate, We Are Now Neutral , " today we are back to comment on Heidelberg Materials' Q2 release ( OTCPK: HLBZF , OTCPK: HDELY ). Here at the Lab, we view the company's financial performance positively, but we are more cautious about the real estate sectors, and we believe that the upgrade cycle is quite mature now. This was the reason behind our neutral rating target after Heidelberg's Q1 financial update.
Q2 results
Starting with the CEO's comment, he explained how Heidelberg closed H1 2021 with a good result "e ven in a weaker market environment, with significant declines in sales volumes in some cases," performing exceptionally well. He also expressed his confidence " about the second half of the year and are once again upgrading our outlook for 2023 significantly ."
Source: Heidelberg Materials Q2 results presentation
Cross-checking Wall Street analyst expectations, Heidelberg Materials recorded better numbers than consensus in all regions and financial ratios. Indeed, the company has seen meaningful positive earnings momentum since lower EU energy prices.
Source: VARA consensus .
Looking at the numbers, the company's top-line sales reached €10.47 billion with a plus 8.5%. More important to note is the core operating profit evolution which in Q2 delivered a plus 37.5% to €1.18 billion with acceleration on a quarterly basis. As mentioned in our Q1 release, Heidelberg Materials is moving forward with lower CO? emissions which were further reduced by 2.4%. Aside from the renewable energy sectors, here at the Lab, we believe the EU Innovation Fund will support the company as a pioneer in carbon capture storage ((CCS)).
In addition, Heidelberg Materials has a share buyback program in place, and in Q2, the company completed its second repurchase tranche for a total amount of €346 million (Fig 1). There is still a third tranche up to €300 million to arrive at the company's aim of €1 billion. Despite that, the company paid its dividend and decreased its financial debt. Net debt was at €6.7 billion with a leverage ratio of 1.67x (Fig 2).
Following the impressive H1 results, the company increased (for the second time this year) its yearly guidance. Results from operations are now expected to be in the €2.7 billion to €2.9 billion range versus previous estimates between €2.50 billion and €2.65 billion (Fig 3).
Fig 1
Fig 2
Fig 3
Changes to estimates
- Heidelberg Materials' principal profitability driver was rising prices. This drove price/cost benefits;
- What surprised us was the product price resilience in the cement market with robust supply/demand in the EU and North America. Despite that, rising interest rates and high inflation will likely decrease construction activity. Therefore, we expect a slowdown in real estate construction;
- We don't believe this situation will last in the coming years, but given the company's guidance, we now forecast a Fiscal Year EBITDA to increase by approximately 16%. Looking at the medium-term horizon, we anticipate an EBITDA increase of 2/3% per year, and we are below management target on 2025 EBITDA margin (Heidelberg is projecting a 22%, while we are at around 20%);
- On the upside, the North American region might be an opportunity for improvement in profitability. The company has underperformed recently, and the Mitchell plant ramp-up could help achieve best-in-class earnings;
- Given the H1 debt level, with solid FCF estimates, we are now projecting year-end net debt at €4.8 billion.
Conclusion and Valuation
Here at the Lab, we believe that macroeconomic challenges must be noticed. We think we are getting closer to the end of the upgrade cycle, and despite the share trading at low multiples, they are in line with the company's historical valuation. Following the H1 results, we are increasing the target price from €70 to €75 per share. In our estimates, the company trades on a 7x P/E and 5.5x 12 months EV/EBITDA with a solid 12% FCF yield. We also upgraded our earnings per share forecast by 6.5% for the next year, and we believe the company's new target is now at the upper end of the new guidance range. Therefore, our H2 EBITDA is estimated to grow by around +12%, but we believe the upside is now more limited. Downside risks include the industry's decarbonization challenge, energy cost prices given the winter period ahead, regulatory changes, building cycles, and (again) higher interest rates.
For further details see:
Heidelberg Materials: Maturing Cycle, Again Neutral