HeidelbergCement Credit Confidence Grows as Debt DeclinesAlex Webb
HeidelbergCement AG said debt declined more than expected last year as improved earnings covered dividends and repayments, bringing the German company closer to reclaiming investment grade status.
Borrowings declined 700 million euros ($906 million) to 7 billion euros, the Heidelberg-based company said today in a statement. Analysts had predicted 7.4 billion euros. The price of credit-default swaps insuring HeidelbergCement against default dropped 13 basis points today to 203, the lowest since June 2008, according to data compiled by Bloomberg. A decline signals an improvement in perceptions of credit quality.
HeidelbergCement is regaining ground after losing its investment-grade status in 2008 following the purchase of Hanson for $18 billion and a near 100 percent drop in profit amid the onslaught of the financial crisis. The company forecast a “significant” improvement in profit this year.
“In 2012, we took the next consistent step toward reaching our strategic goals,” Chief Executive Officer Bernd Scheifele said today. “We see great savings potential in the next few years.”
The stock gained as much as 4.8 percent to 57.18 euros and closed 3 percent higher in Frankfurt trading, valuing the company at 10.5 billion euros. Before today, the shares had risen 19 percent since the start of the year, with some investors speculating the cement maker will benefit from a recovering U.S. construction industry, while Germany’s benchmark DAX index gained 4.7 percent.
HeidelbergCement plans to pay a dividend of 47 cents. The company, which makes about 25 percent of its sales in North America, is graded Ba1, the highest junk ranking, by Moody’s Investors Service. It is rated an equivalent BB+ by Fitch Ratings. An “acceleration in the improvement in credit metrics” may justify an upgrade, Fitch said Dec. 17.
HeidelbergCement has raised its cost-cutting target for the three years to the end of 2013 to 1.01 billion euros, of which 240 million will be realized this year. It reduced net debt in the third quarter by almost 10 percent, and beat its spending-reduction target by 21 percent. The rebound in U.S. housing was “pivotal” in meeting targets, Group Treasurer Henner Boettcher told Bloomberg last month.
“The debt reduction is a notch better than expected,” said Frankfurt-based Commerzbank analyst Norbert Kretlow, who recommends buying HeidelbergCement shares. “The dividend is far more than the 35 cent consensus I saw.”
The mid-term net debt target of 6.5 billion euros was reiterated today by CEO Scheifele. The company will meanwhile invest around 525 million euros in maintenance and some 575 million euros in expansion this year.
As part of an emerging market growth plan, the company is adding 5 million tons of cement capacity this year, with more than half of that gain already achieved via a project in India. Further growth will come in Indonesia and Liberia, while at least 4.5 million tons of capacity will be added globally in 2014.
Energy costs have declined this year, falling 4.3 percent in January, Scheifele said, adding that lower costs for futures contracts mean that the company sees little likelihood of energy prices increasing this year. The company usually spends around 770 million euros on electricity, 520 million euros on coal and 310 million euros on diesel, he said.
The German company and Jona, Switzerland-based competitor Holcim Ltd. today announced they will work together in Australia.
Holcim will sell 25 percent of its Cement Australia unit to HeidelbergCement and both companies will have an equal footing on the board, with the chairman seat rotating. The venture has about A$1 billion ($1 billion) in revenue.
The deal will help resolve tensions in the running of the company, according to Chief Financial Officer Lorenz Naeger. While HeidelbergCement had a blocking vote, it was not involved in decision making processes, he said.
“Cement Australia delivers 80 percent of its concrete production to Holcim and HeidelbergCement,” so an equal shareholding creates customer equality, Naeger said. The previous set-up “led to tensions on a business level which made the running of the business to become increasingly difficult.”