Cemex concretes its Manila IPO plans

Market reaction to Cemex Philippines’s upcoming IPO could well be a reflection of confidence towards the nation’s industrial development.

Mexican buildings materials supplier Cemex officially launched the partial sale of its Philippine operations on Tuesday, looking to raise Ps24.4 billion ($525 million) in what would be the country’s largest initial public offering from the industrial sector.

The deal for up to 45% of Cemex Philippines, which would be Manila's second listing of a global cement giant subsidiary after Holcim Philippines, has strong support from cornerstone investors.

Its success or otherwise will nonetheless provide an early gauge of investor confidence in the new government's ability to sustain the country's healthy pace of economic development and spread its benefits more effectively.

Cemex’s motto is “building a better future”, which matches president-elect Rodrigo Duterte’s vision to bring radical change to the Philippines. One of his campaign pledges was to establish a federal system of government, moving away from a more centralised system that earmarks more resources for Manila and its surrounding area over other Filipino regions. That stems largely from the fact that Duterte was previously mayor of Davao City, the country's biggest city outside of Metro Manila.

Such a restructuring of the state would allow regional governments to accelerate economic development locally to the potential benefit of Cemex Philippines, which has the majority of its business on the southern outlying islands of Visayas and Mindanao. Davao is the biggest city on Mindanao. 

According to the preliminary prospectus, Cemex Philippines is the largest cement supplier on Visayas with a 40% market share and the second-largest on Mindanao with a 21% share. Nationally, it is the third-largest cement producer with 20% market share, trailing Holcim Philippines and Republic Cement & Building.

The link between cement sector prospects and politics is an important one because unlike consumer companies, cement and aggregates suppliers are less able to adjust their product mix and advertising strategies to defend earnings when economic growth slows. Instead, they often depend on infrastructure spending and general levels of construction. Government trade policy can also weigh if it impacts the cost of commodity imports.

Terms and valuation

Initial terms of the Reg S/144A transaction are 2.03 billion new shares offered at an indicative price range of Ps10.5 to Ps12 per share, according to a source familiar with the situation. There is a 15% upsize option to issue an additional 305 million shares.

Foreign and domestic investors are divided by an initial 70/30 spilt in terms of share allocation.

On a pre-shoe basis Cemex Philippines will have a post-listing free float of 41.6%, which would increase to 45% if the upsize option is triggered. In either case, Mexican parent Cemex will retain a controlling stake in the firm.

At the indicative price range, Cemex Philippines will have a market capitalisation of between $1.1 billion and $1.26 billion excluding greenshoe. It will be roughly 45% smaller than Holcim Philippines, the only cement producer currently listed on the Philippine stock exchange.

Cemex Philippines will be valued at 10.2 to 10.8 times EV/Ebitda for the 2016 financial year, according to the source, which will imply a slight premium to Holcim Philippines’s current valuation at 9.6 times EV/Ebitda.

Apart from organic growth in cement demand and price, a key earnings driver for Cemex Philippines will be its plans to expand capacity.

According to its preliminary prospectus, Cemex Philippines plans to spend $300 million to expand cement production capacity by 1.5 million tons by the end of 2019. That would increase the current installed capacity of 5.7 million tons by 26%, according to its preliminary prospectus.

A total of six cornerstone investors have agreed to co-invest $105 million in Cemex Philippines. All are asset management companies -- Blackrock, Fullerton Fund Management Fund, Avanda Investment Management, Target Asset Management, Wellington Management, and AR Capital.

Their commitment will account for 19.9% to 22.7% of the total offering, depending on final pricing.

Under the tentative timetable, Cemex Philippines will close the institutional offering for the IPO on June 29, followed by a domestic retail offering between July 4 and July 11. The company's shares are then scheduled to begin trading on the Philippine stock exchange on July 18.

Joint bookrunners of the transaction are CitigroupHSBC and JP Morgan, while BDO Capital is a domestic underwriter.

Please click here for more information from FinanceAsia’s previous coverage on Cemex Philippines.

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