Wall Street Showing Some Love for Mexican Billionaires’ Newcomer

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  • Morgan Stanley, Santander recommend buying Elementia's shares
  • Stock trading at discount to industry giants including Cemex

Some of the world’s largest financial firms are betting Mexican billionaires Carlos Slim and Antonio del Valle Ruiz will work their magic to boost the value of cement maker Elementia SAB.

Morgan Stanley, Banco Santander SA and Credit Suisse Group AG all have buy recommendations for the stock, and see an average rally of more than 40 percent over the next year. Since going public last month in a sale that fell short of the company’s target, the shares have climbed almost 6 percent. While that compares with a 5 percent slide in the nation’s equity benchmark, Elementia trades at a discount to regional peers including Cemex SA, the biggest cement maker in the Americas.
It was actually the urge to face those behemoths and become more competitive that made the company backed by two of Latin America’s richest men turn to capital markets. Last year, Elementia made its debut bond offering to help pay off a stake in its cement unit. Slim and del Valle’s long history of creating value in diverse industries may boost the company, according to Credit Suisse.

Carlos Slim

Photographer: Susana Gonzalez/Bloomberg

“Elementia is certainly not lacking resources to grow as its investors are among the wealthiest people in the country,” Gerardo Copca, an analyst at Metanalisis SA, said from Mexico City . “They know they’re competing with huge companies, but they have the funds to do so.”
The Mexico City-based company, which also produces metals, plastics and construction materials, plans to use part of the proceeds from its stock sale to make the final payment on its purchase of the 47 percent of Cementos Fortaleza it didn’t already own from Paris-based Lafarge SA. The firm, known for its sponsorship of Mexican professional wrestling, is now Elementia’s main cement division.
The initial public offering will allow for acquisitions over the next few months and years, Chief Executive Officer Fernando Ruiz said on July 13, without mentioning any specific targets.

‘Small Acquisitions’

The strategy of buying other companies and boosting earnings led del Valle’s petrochemical giant Mexichem SAB to a 76-fold stock return from 2002 to 2011. The company has negotiated at least 21 deals since 2004 and plans to continue its shopping spree.
After two decades of investments in Mexico’s phone business added Slim to the ranks of the world’s wealthiest people, he’s decided to diversify
beyond the Latin American nation. The decision has paid off at least for his telecommunications company. While America Movil’s profit margins in Mexico shrank in the second quarter, they increased in both Brazil and Europe. The billionaire is the world’s fourth-richest person with a net worth of $58.3 billion, according to the Bloomberg Billionaires Index.

Growth Opportunities

“We believe that, under the guidance of such pair of sponsors, the execution risk related to management changes is mitigated,” Vanessa Quiroga, an analyst at Credit Suisse, wrote in an Aug. 20 note to clients. “Such sponsorship should enhance Elementia’s growth opportunities.”
Credit Suisse, Morgan Stanley and Santander were among the banks listed in the statement for Elementia’s IPO.
The company’s revenue climbed 16 percent to about 4.4 billion pesos ($258 million) in the second quarter.
“The quarterly results were received very positively by analysts, and they confirm our growth in a challenging environment,” Juan Francisco Sanchez Kramer, the head of investor relations for Grupo Kaluz, del Valle’s holding company, said in an e-mailed response to questions.

Stock Discount

While Elementia is trading at an attractive discount of 30 percent to the industry average, it’s still a “show-me story,” Nikolaj Lippmann, an analyst at Morgan Stanley in Mexico City, wrote in an Aug. 20 note to clients. He started covering the stock with the equivalent of a buy rating.
“Elementia is entering the cement business at a time of global consolidation, without the technical best practice of its international competitors,” he wrote. “This will require patience and skill. The market needs to understand this, and management needs to execute it.”
The Fortaleza unit would consider acquisitions of small- to mid-size cement companies, and might try to build some new plants, Kramer said in May.
“Elementia has the willingness to grow and the financial capabilities to do so,” Cecilia Jimenez, an analyst at Santander in Mexico City, wrote in an Aug. 21 note to clients. The company might be able to “capture share in the underdeveloped LatAm housing market as well as to participate in the U.S. housing recovery,” she said.