Cemex Philippines IPO tests Duterte effect

The Mexican cement producer plans to spin off its Philippine operations to repay short-term borrowings in first market test since new president was elected.

Mexican building materials supplier Cemex has officially kicked off the partial sale of its Philippine operations through an initial public offering on the Manila stock exchange, posing the first test of market sentiment towards new equity offerings since Rodrigo Duterte's election as president.

Premarketing of the Reg S/144A transaction started on Friday and will run through June 10, according to a source familiar with the situation.

The IPO will be closely watched as a measure of investor sentiment on the Philippines as the tough-talking Duterte prepares to take office on June 30, and on the country's industrial sector, which has attracted far less international interest than the consumer sector.

According to Cemex’s filing with the Philippine Securities and Exchange Commission, the company plans to sell new 2.34 billion shares through the IPO and retains 55% of the Philippines unit. Cemex Holdings Philippines, as the subsidiary is officially named, could raise Ps39.7 billion ($860 million) based on the maximum of Ps17 per share.

Nonetheless, sources familiar with the situation said the offer price is largely indicative and the final offer size could be around $500 million. Still, that would make it the country’s largest IPO since Robinson Retail Holdings’ $621 million transaction in 2013.

Market response to the IPO will be a gauge of investor confidence in the development of the Philippines' industrial sector, as most foreign investment has instead flowed into the fast-growing consumer sector. In recent years, the major equity offerings out of the Philippines included LT Group, Robinson Retail and Travellers International, all from the consumer sector.

Duterte, who has attracted headlines more for his uncomprimising rhetoric on crime than his economic thinking, has pledged to increase spending on infrastructure projects and accelerate a public-private partnership scheme initiated by outgoing president Benigno Aquino III.

The outspoken president-elect last week announced plans to build a new railway system to connect Manila to three locations in Luzon: Nueva Ecija, Sorsogon and Batangas. He has also unveiled plans to establish a railway system in the southern island of Mindanao.

To benefit from these infrastructure projects, 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.

Debt restructuring

The spin-off of Cemex’s Philippine operations is part of the group’s plan to reduce its debt by $2 billion by the end of next year. According to the company’s annual report, it has outstanding debt of nearly $4 billion due the end of this year, while its long-term debt amounts to $12.3 billion.

Cemex expects the debt reduction programme, which will be conducted mostly through asset sales, to help it recover the investment-grade ratings it lost after the global financial crisis of 2008.

The company is rated B+ by S&P and BB- by Fitch, representing three and four notches respectively below investment grade.

Monterrey-based Cemex announced the disposal of some of its US production facilities to Mexico’s Grupo Cementos de Chihuahua for $400 million last month.

Company profile

Cemex Philippines is the country’s third largest cement producer by production capacity, with a 20% market share last year. That ranked behind Holcim Philippines and Republic Cement & Building, according to Cement Industry Report.

Yet the Philippines made up only a small portion of Cemex’s global revenue last year. According to Cemex’s annual report, Asian operations including the Philippines contributed just 5% of total sales.

While only a small part of the global business, Cemex Philippines reported a higher operating Ebitda margin of 20.6% last year, compared to 18.7% at the group level.

The company operates two production facilities, in Cebu and Rizal.

Cemex Philippines could potentially benefit from the increasing cement demand in the domestic market. Total cement demand is expected to reach 36.5 million tons by 2020, which represents an average annual growth of 8.4% from 24.4 million tons in 2015.

But the company is also likely to face fierce competition from a number of major local cement producers that have announced capacity expansion plans to help capture such demand.

San Miguel, the country’s fourth largest cement producer by volume, is the most aggressive market participant after announcing plans to increase capacity by 10 million tons. Holcim Philippines is also planning to increase capacity by 2.6 million tons.

In recent years, oversupply of cement in neighboring countries such as Vietnam, Indonesia and China has also added pricing pressure to Philippine cement producers as cement producers there exported the excess supply.

Valuation and timetable

Cemex Philippines’ indicative market capitalization of $1.1 billion equates to approximately 17 times earnings last year. This represents a significant discount to the parent’s shares on the Mexican stock exchange, which trade at a price-to-earnings multiple of 58 times.

Industry sources say Holcim Philippines, the nation’s only listed cement maker, could be directly comparable to Cemex Philippines. Holcim currently trades at 12.1 P/E, but the stock’s underperformance could largely be attributed to uncertainties over the merger of its Swiss parent and French cement maker Lafarge.

Under the tentative timetable, Cemex Philippines will start institutional offering in the third week of June with a June 27 target pricing date. It is set to trading on the Philippine stock exchange on July 11.

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

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