October 20, 2020

Vicat: A Cheap Cement Producer With Exposure To Frontier Markets (OTCMKTS:SDCVF)

Vicat (VCT:PA, OTC:SDCVF, OTC:VVCTY) is a French small-cap cement producer majority-owned by the eponymous family. Over the years, it has increased its global footprint, with a focus on emerging and frontier markets like India, Brazil, West Africa, and Central Asia.

This positioning bodes well for the long-term growth of Vicat’s operations, and, interestingly, the stock currently trades at what I consider an unwarranted discount to its peers (see chart below). I expect Vicat to close the gap in the next few months. Beyond that, the company should resume its growth trajectory and continue to reward investors through dividends.

Source: Yahoo Finance. European peers on this chart are Heidelberg Cement (OTCPK:HLBZF, OTCPK:HDELY) and Lafarge Holcim (OTCPK:HCMLF, OTCPK:HCMLY)

Vicat In A Nutshell

Vicat produces cement, ready-mixed concrete, and aggregates – products that are related as per the chart below:

Source: company’s annual report

The contribution of each segment to Vicat’s EBITDA is set out below, with cement seen to be the main product line:

Source: company’s annual report

In terms of geographies, the company operates in 12 countries: France, Switzerland, Italy, the U.S., India, Brazil, Turkey, Kazakhstan, Egypt, Mali, Mauritania, Senegal. Emerging markets now represent a third of total sales, following an acquisition in Brazil in 2019.

Source: company’s annual report

I like the fact that Vicat goes off the beaten track to invest, within the emerging market universe, into the so-called frontier markets like Western Africa or Central Asia. When it comes to construction activities, these are areas that will deliver lots of growth for decades to come, possibly more than the larger emerging markets. With vast infrastructure and housing needs, underpinned by growing populations, these are very promising regions for a cement producer. This search for new markets is at the core of Vicat’s strategy, even if such areas are notoriously more volatile in the short term:

The Group’s strategy is to combine investments in developed countries, which generate more regular cash flows, with investments in emerging markets offering significant growth opportunities in the longer term, but which remain subject to more significant market fluctuations.

Source: company’s annual report

With regards to the ownership structure, the Vicat family remains in charge with more than 60% of the share capital and almost 75% of the voting rights (Parfininco and Soparfi belong to the family):

Source: company’s annual report

This could raise concerns that minority shareholders could be at a disadvantage, but I’ve been following – and now investing in – this company for years and have seen no sign of shareholder-unfriendly behavior.

H1 Results

The story of H1 was, of course, that of the Covid-19 impacts. The lockdowns in most of the jurisdictions where Vicat operates, obviously, had detrimental effects. Moreover, this is a fixed costs-heavy business, so a small decrease in revenue can have a large impact on the bottom line:

Source: company’s H1 ’20 results presentation

However, there were some positive messages from H1. First, despite the worst-possible conditions and the adverse impact of operating leverage, the company remained in the black. When it comes to cash flow, FCF was actually steady, at €175m (+1.3% vs 2019). Net debt, meanwhile, remains under control at €1,271m as of June 30 (2.4x 2019 EBITDA), to be compared to €2,404m in shareholders’ equity.

Outlook

Unlike most other industries, construction restarted immediately after the lockdowns (see chart below) and remained strong over the summer.

Source: company’s H1 ’20 results presentation

As a result, Vicat expects full-year EBITDA to come in only moderately below that of 2019:

The Group anticipates a moderate decline in EBITDA over the full year, subject to the effects that any second wave of the pandemic might have.

Source: Company’s H1 ’20 report

As to the specific outlook for each geography, the company provided the following detail:

Source: Company’s H1 ’20 report

Therefore, there appears to be a disconnect between recovering operations (and solid long-term prospects) and a stock price that remains significantly below its pre-Covid-19 level, at odds with that of peers.

Insider Purchases

It looks like the majority of owners are aware of this disconnect, given that management and members of the Vicat family regularly bought stock on the open market (Euronext Paris) during Q2.

Dividends

Despite the Covid-19 situation, Vicat paid a 2019 dividend of €1.5 per share in March (5.1% yield at the current share price of €29.1), at a time when companies were encouraged to cancel or postpone their distributions. This shows Vicat’s commitment to paying a steady dividend, year after year:

Source: company’s annual report

Risks

Of course, a further deterioration in economic conditions, and further lockdowns, are a risk. But infrastructure spending has been the main focus of many stimulus packages, which tends to mitigate the impact for cement producers.

Vicat is exposed to emerging currencies that can be very volatile. The Turkish lira has been in freefall of late. Egypt is another country that has been troublesome for Vicat in recent years. The stronger euro could also be a headwind in H2.

Energy prices represent around 30% of production costs in the cement business. High energy prices could be problematic, but at the moment, the low oil prices are of course a tailwind.

  • Environmental requirements

This is a real area of concern for cement producers, as Europe, in particular, implements more stringent environmental policies. However, these policies apply to all local producers so, ultimately, the excess costs might be passed on to clients.

Valuation

Based on the 2019 performance, the stock currently trades at a P/E of 8.7. When it comes to EV/EBITDA metrics, the company has a ratio of 5 (with ’19 EBITDA of €526m, net debt of €1,271m and a market cap of €1,316m).

This valuation is not demanding, in my opinion, given that Vicat operates in many fast-growing regions. What’s more, the Brazilian acquisition was in the process of being integrated in 2019 and will contribute more meaningfully going forward.

Due to Covid-19, Vicat has also implemented some restructuring actions that will produce permanent savings in future years. For instance, the company decided to move the head office from the expensive Paris area to the more affordable Rhône-Alpes region.

Price Target

The average price target of analysts covering the stock is €38.65, implying 33% upside potential.

Source: Boursorama.com

I think this is a reasonable target for the next 12 months, but this would only bring the share price back to its pre-Covid-19 level. Longer term, the upside potential is higher, in my view.

Conclusion

Vicat is the kind of boring business that won’t attract speculators’ interest, but it could create a lot of value for shareholders over the long run, through both dividends and growth. And given the stock’s current undervaluation, a rebound could be in the cards in the coming months if H2 ’20 meets management’s expectations.

Disclosure: I am/we are long VCT:PA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The opinions and views expressed in this article are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector.

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