Company Reports

Narrow-moat Holcim delivered a 16% increase in organic operating profits, or a 90-basis-point improvement in its EBIT margin, during the first quarter, an indication that the group’s ongoing margin expansion is maintainable despite its record profitability during fiscal 2023. The first quarter is typically the least meaningful of the year for the construction sector, but we remain positive that the group will be able to achieve its 18% EBIT margin target for the full year given Holcim's strong start. Shares are trading broadly in line with our CHF 72 fair value estimate, which we maintain.

We’re raising narrow-moat Holcim’s fair value estimate by 20% to CHF 72 from CHF 60 after reviewing its annual report, which highlights the impressive operating margin it earned from its products and solutions segment, and provides further clarity about how its role in decarbonizing cement will be margin-accretive. Having achieved margin expansion of 150 basis points during fiscal 2023, we believe Holcim can maintain current levels in the medium term, increasing our average EBIT margin to 18.0% between 2024 and 2027 from 17.4%. Shares remain at a slight premium.

The merger between Lafarge and Holcim in 2015 created the largest producer of building materials. Since then, the group has diversified its exposure to heavy building materials by establishing a $4 billion roofing business via several acquisitions. Its acquisitive strategy has been funded by divestments of cement businesses in emerging markets, notably in India, which was the group's second-largest geographic market. Portfolio management has tilted Holcim’s revenue contribution toward the US, where the group will list its North American business separately.

Narrow-moat Holcim’s strong fiscal 2023 results reflect the successful execution of its strategy to grow a diversified building materials business, which is focused on mature geographies that exhibit higher barriers to entry and superior growth. Shareholders have been rewarded with a 12% dividend increase and new CHF 1 billion share buyback program, translating into a combined capital return (dividend plus buyback) yield of 6% based on the current market capitalization. Guidance for organic revenue growth above 4% and a further 40-basis-point margin expansion to 18% during fiscal 2024 reflects the group’s favorable geographic positioning and ability to grow market share through its low-carbon-branded product alternatives. We maintain our CHF 60 fair value estimate and view shares as fairly valued.

Narrow-moat Holcim announced it will be separately listing its North American business, which currently contributes 40% of group revenue, pending shareholder approval. The decision makes strategic sense given limited synergies for building materials across geographies. We expect the decision to be viewed favorably by shareholders since shares in the U.S. trade at a premium to European businesses and will likely support a higher market valuation for the business, evident by the 4% jump in the share price. CRH, which is a direct competitor with Holcim, has recently benefited from a multiple rerating by similarly shifting its primary listing to the United States from Europe. However, Holcim’s North American business is much smaller than CRH’s and is also more exposed to cyclical end markets, therefore we maintain our current CHF 60 fair value estimate. Shares are fairly valued.

The merger between Lafarge and Holcim in 2015 created the largest producer of building materials and introduced significant exposure to perceived faster-growing emerging markets, albeit with lower barriers to entry. However, the recent divestment of the Indian cement business (the group's second-largest geographic market) and a series of acquisitions focusing on lighter building materials have transformed Holcim's exposure to be predominantly geared toward mature markets.

Narrow-moat Holcim reported organic EBIT growth of 14% to CHF 1.60 billion during the third quarter, marginally exceeding company-compiled consensus estimates of CHF 1.56 billion. EBIT margin expansion occurred across geographies and business units supported by higher pricing but also benefited from the divestment of its cement business in India last year. Similarly to Heidelberg Materials, which upgraded its EBIT margin guidance in its trading update last week, Holcim has followed suit, raising its full-year EBIT margin guidance to above 17% from 16%. We aren't surprised by the raise in its guidance and had forecasted margins of approximately 17%. We maintain our CHF 60 fair value estimate and view shares as fairly valued.

Narrow-moat Holcim reported organic revenue growth of 7% during the second quarter, outperforming peers Heidelberg Materials and Saint-Gobain, who also reported results in the past 24 hours. We attribute Holcim’s superior performance to its greater weighting toward the U.S., where the construction environment appeared to be more robust than other regions. Price increases implemented in prior periods are continuing to stick, which combined with easing commodity prices, supported EBIT margin expansion across each geographic segment, resulting in EBIT margin expansion of 220 basis points to a record 21.1%. Management confirmed its full-year guidance, which was upgraded during the previous quarter. We expect Holcim's EBIT margin target of 16% to be comfortably achieved this year and reiterate our CHF 60 fair value estimate. Shares are trading in line with our fair value estimate.

Narrow-moat Holcim has started the year in the same manner it left off in 2022, outperforming its own expectations and raising its full-year guidance. First-quarter organic revenue growth of 8% and a healthy order book for infrastructure projects has given management confidence to raise its full-year revenue growth guidance to above 6%, an increase from initial expectations of between 3% and 5%. Organic EBIT growth of 8% has been supported by strong pricing and some easing in cost inflation. Following the divestment of its cement business in India and the rapid growth of its roofing segment, Holcim’s end market exposure to repair and maintenance and activity has increased, which is less cyclical than new residential construction. We raise our fair value estimate to CHF 60 per share from CHF 56 to account for the strong start to the year and raise our EBIT margin outlook to 16.5%, an expected increase of 20 basis points compared with 2022 and in line with management's updated guidance of above 16%. Shares are fairly valued.

The merger between Lafarge and Holcim in 2015 created the largest producer of building materials and introduced significant exposure to perceived faster-growing emerging markets, albeit with lower barriers to entry. However, the recent divestment of the Indian cement business (the group's second-largest geographic market) and a series of acquisitions focusing on lighter building materials have transformed Holcim's exposure to be predominantly geared toward mature markets.

We were not surprised by narrow-moat Holcim’s full-year performance, which exceeded management’s upgraded guidance provided last quarter, and thus maintain our CHF 56 fair value estimate. Organic revenue and EBIT grew by 13% and 7% respectively, which given Holcim’s shift in product mix toward materials with lower capital intensity, unsurprisingly sits in the middle of the pack between heavy building materials manufacturer HeidelbergCement and downstream producer Saint-Gobain. However, the group was more upbeat in its outlook for 2023 than peers, guiding for organic revenue growth between 3% and 5% and an overproportional increase in profit. A dividend of CHF 2.5 has been proposed, an increase of 14% year over year, and confirms management's confident outlook. We view shares as fairly valued and maintain CRH as our preferred pick in the sector.

Narrow-moat Holcim has taken another step to shift its product portfolio toward materials with lower-capital (and lower-energy) intensity through the $1.3 billion acquisition of roofing business Duro-Last. The acquisition is consistent with the group’s ambition for its building and solutions segment to represent 30% of sales by 2025, and expands its portfolio of roofing solutions, complementing acquisitions of Firestone Building Products and Malarkey Roofing Products in 2021. A wave of acquisitions in North America (and divestments of its India and Brazil cement businesses) have increased Holcim’s revenue contribution from North America, which we support due to the region’s favorable outlook. However, our preferred pick in the sector remains CRH, which we view as the most defensive in our European construction materials coverage and is an undervalued way to get exposure to an acceleration in U.S. infrastructure spending. We maintain our CHF 56 fair value estimate for Holcim and view shares as fairly valued.

The merger between Lafarge and Holcim in 2015 created the largest producer of building materials and introduced significant exposure to perceived faster-growing emerging markets, albeit with lower barriers to entry. However, the recent divestment of the Indian cement business (the group's second-largest geographic market) and a series of acquisitions focusing on lighter building materials have transformed Holcim's exposure to be predominantly geared toward mature markets.

The merger between Lafarge and Holcim in 2015 created the largest producer of building materials and introduced significant exposure to perceived faster-growing emerging markets compared with its European-domiciled competitors. However, lower barriers to entry in these regions and the cyclical nature of demand has meant volume growth has not always transpired. We have been impressed by management’s self-help actions following the acquisition, which have strengthened Holcim’s balance sheet and protected best in-class-operating margins through divestments and cost savings.

Narrow-moat Holcim's third-quarter results confirmed that our investment thesis is firmly intact, reporting record quarterly revenue and raising full-year guidance for its third-consecutive quarter. The higher full-year revenue guidance of at least 12% like-for-like growth and mid-single-digit EBIT growth did not come as a surprise to us, given Holcim's strong pricing and the shift in its product portfolio toward materials with lower capital (and energy) intensity. Strong operating performance, combined with over CHF 7 billion in proceeds received from divestments this year, led management to announce a CHF 2 billion share repurchase. We view the decision as astute capital allocation, with shares currently trading at a 20% discount to our CHF 56 fair value estimate, which we maintain. The buyback is significant, accounting for over 7% of the group's market capitalization, which combined with the group's attractive (and stable) 5% dividend yield, provides shareholders with a compelling expected return profile. Despite Holcim having outperformed both its European and U.S. peers, we believe shares remain undervalued.

Narrow-moat Holcim successfully offset significant cost inflation, which exceeded CHF 1 billion, to deliver 13% organic revenue growth and 6% EBIT growth during the first half of the year. Growth was driven by price increases and strong demand for Holcim’s downstream solutions & products segment, which is becoming an increasing part of the business and now contributes 18% of group sales. The shift in business mix and ability to raise prices to help offset inflation confirms our investment thesis, which, combined with the group’s shareholder-friendly capital return, we believe will lead to attractive shareholder returns. We reiterate our CHF 56 fair value estimate and view shares as undervalued.

The merger between Lafarge and Holcim in 2015 created the largest producer of building materials and introduced significant exposure to perceived faster-growing emerging markets compared with its European-domiciled competitors. However, lower barriers to entry in these regions and the cyclical nature of demand has meant volume growth has not always transpired. We have been impressed by management’s self-help actions following the acquisition, which have strengthened Holcim’s balance sheet and protected best in-class-operating margins through divestments and cost savings.

We support Holcim’s decision to divest its Indian business, which is consistent with our investment thesis and believe will help justify a multiple rerating in the business. The divestment accelerates the group’s shift in product mix toward less carbon-intensive cement operations, one of the contributors to a discount being placed on the group’s share price. The divestment of its Indian business, which is Holcim’s second-largest geographic market also supports our narrow moat rating. Permits are easier to obtain in emerging markets, resulting in lower barriers to entry and thus easier for a region to become oversupplied. We view the sale price of CHF 6.4 billion as fair, translating into a 13% premium over the average three-month share price and a 14.5 times EV/EBITDA multiple. We maintain our CHF 56 fair value estimate and view shares as undervalued.

Narrow-moat Holcim exceeded company-compiled consensus estimates, reporting first-quarter revenue and EBIT growth of 20% and 16%, respectively. Growth was driven by price increases of 11% and a double-digit contribution from acquisitions within the building solutions segment, which are less energy-intensive than cement production. Like-for-like revenue guidance was upgraded to 8% from 6% and is expected to be at least 10% after including the contribution from acquisitions, due to stronger pricing and better-than-expected performance from recent acquisitions. The shift in business mix and ability to raise prices to offset inflation confirms our investment thesis, which combined with the group’s shareholder-friendly capital returns, we believe will lead to attractive shareholder returns. We reiterate our CHF 56 fair value estimate and view shares as undervalued.

European building material manufacturers have reversed any share price gains they had made year to date since Russia invaded Ukraine on Feb. 24. While the direct exposure to both Russia and Ukraine is no more than 1% across our coverage, the energy-intensive manufacturing process (most notably for cement) has spooked investors due to rising energy prices as Russian supplies of critical oil, gas and coal are shunned. Although it is too early to comment on the sustainability of recent commodity price movements, we believe narrow-moat CRH, HeidelbergCement and Holcim will be able to manage higher energy prices without us needing make significant changes to our fair value estimates. The sector is undervalued with an average price/fair value ratio of 0.79 on March 8.