Company Reports

Heidelberg Materials is one of the largest manufacturers of building materials globally, with a significant contribution of revenue from cement production. The cement industry is a notorious contributor of carbon dioxide emissions, which has made the sector uninvestable for many investors due to environmental concerns. Heidelberg will accelerate investments into carbon capture and storage technologies to help lower its carbon footprint. However, the benefits are only likely to be realized in the second half of this decade and are unlikely to provide a catalyst for the market to assign a significantly higher multiple on the business in the short term. Unlike peers CRH and Holcim, there is no indication of Heidelberg entering the downstream building products sector, which has a lower ESG Risk Rating.

Narrow-moat Heidelberg Materials grew operating profit by 22% to EUR 3 billion, ahead of its original guidance set at the start of 2023, but in line with company-compiled consensus. The 253-basis-point improvement in its operating margin has been supported by lower energy costs and higher building material prices, which will likely protect profitability in the short term and underpin the increase in our fair value estimate to EUR 84, from EUR 80. However, we think the likelihood of further margin expansion in the future is unlikely, reflected in its fiscal 2024 operating profit guidance between EUR 3 billion and EUR 3.3 billion, implying marginal growth at best. Room for further price increases is limited, given a weak outlook for construction activity, which we anticipate will keep operating profit largely unchanged in fiscal 2024. Shares are currently fairly valued.

Narrow-moat Heidelberg Materials reported 2% organic revenue growth during the third quarter, entirely driven by higher selling prices, which managed to offset a decline in volumes. Its weaker sales growth compared with Holcim, during both the third quarter and year to date, can be attributed to Heidelberg's greater exposure to declining residential construction activity and its lower revenue contribution from North America, where the outlook for construction is more favorable because of recently signed legislation. Management has raised its full-year operating profit guidance by 4.5% at the midpoint to between EUR 2.85 billion and EUR 3.0 billion, as previously communicated in a trading update on Oct. 19. We maintain our EUR 80 fair value estimate and view shares as marginally undervalued.

Narrow-moat Heidelberg Materials released an unexpected trading update, reporting third-quarter operating profit growth of 24%, which will exceed company-compiled consensus by 11%. The better-than-expected third-quarter profitability has led management to raise its full-year profit guidance by 4.5% at the midpoint—the third consecutive quarter that the group has raised its profit guidance. Our estimates are broadly in line with the revised guidance, and we maintain our EUR 80 fair value estimate. Although shares are marginally undervalued, CRH remains our preferred pick in the sector due to its significant exposure to the United States, which enjoys a favorable outlook for construction spending due to recently signed legislative acts.

With peers in the building materials sector pivoting away from cement and emerging markets, Heidelberg Materials' latest cement acquisition in Indonesia confirms its differentiated strategy. The acquisition of Indonesian local cement producer PT Semen Grobogan will expand the company's cement capacity by 2.5 million metric tons in Indonesia, which contributed 5% of group sales in 2022. This was the sixth-largest region for the group. While we believe the intangible asset moat source in emerging economies is weaker than for developed markets as a result of the high regulatory burden to operate a cement plant because of environmental reasons, we maintain our narrow moat rating for Heidelberg Materials. CRH remains our preferred pick in the sector due to its significant exposure to the United States, which enjoys a favorable outlook for construction spending due to recently signed legislative acts.

Narrow-moat Heidelberg Materials raised its full-year operating profit guidance for the second consecutive quarter as price increases stick and energy costs fall. The aforementioned factors contributed to organic EBIT growth of 17.5% in the second quarter, a faster pace than the 4.6% organic revenue growth because volume declines (most notably in Europe) somewhat offset strong pricing. We have increased our fiscal 2023 EBIT estimate from EUR 2.3 billion to EUR 2.8 billion, which falls at the midpoint of management's revised full-year guidance, as price increases implemented in the previous year appear more sticky than initially anticipated. Declining energy costs provide a further tailwind to profitability, contributing to our fair value estimate increase to EUR 80 per share from EUR 71. The shares appear slightly undervalued and are trading at a mere 8 times consensus (company-compiled) earnings per share estimates. CRH remains our preferred pick in the sector, though, due to its favorable geographic exposure and product mix.

Heidelberg Materials is one of the largest manufacturers of building materials globally, with a significant contribution of revenue from cement production. The cement industry is a notorious contributor of carbon dioxide emissions, which has made the sector uninvestable for many investors due to environmental concerns. Heidelberg will accelerate investments into carbon capture and storage technologies to help lower its carbon footprint. However, the benefits are only likely to be realized in the second half of this decade and are unlikely to provide a catalyst for the market to assign a significantly higher multiple on the business in the short term. Unlike peers CRH and Holcim, there is no indication of Heidelberg entering the downstream building products sector, which has a lower ESG Risk Rating.

Narrow-moat Heidelberg Materials reported organic revenue growth of 13% during the first quarter, outperforming its Europe-listed construction materials peers. We attribute its outperformance to the group's larger weighting toward heavy building materials where price increases were pronounced. While the first quarter tends to be the least material during the year, management has raised the low end of its full-year EBIT guidance from EUR 2.35 billion to EUR 2.5 billion, resulting in a midpoint upgrade of 3%. Construction demand from infrastructure and commercial end markets remains robust, which supports CRH remaining our preferred pick in the sector given it is well positioned for an increase in infrastructure and commercial construction spending in the United States. We maintain our EUR 71 fair value estimate for Heidelberg Materials and view shares as fairly valued.

Narrow-moat HeidelbergCement finished 2022 on a positive note, delivering organic EBITDA growth of 3.1% during the fourth quarter and met its financial targets. The group managed to achieve a positive price/cost spread during the fourth quarter, benefiting from price increases in the high teens and lower energy costs. The company guided for 2023 organic revenue growth and EBIT between EUR 2.35 billion and EUR 2.65 billion, which mostly falls within with our expectations, albeit we are more conservative. We reiterate our EUR 71 fair value estimate, and while shares remain slightly undervalued despite a 40% rally during the last six months, CRH remains our preferred pick in the sector, offering investors higher growth and more defensive end-market exposure.

HeidelbergCement is one of the largest manufacturers of building materials globally, with a significant contribution of revenue from cement production. The cement industry is a notorious contributor of carbon dioxide emissions, which has made the sector uninvestable for many investors due to environmental concerns. HeidelbergCement will accelerate investments into carbon capture and storage technologies to help lower its carbon footprint. However, the benefits are only likely to be realized in the second half of this decade and are unlikely to provide a catalyst for the market to assign a significantly higher multiple on the business in the short term. Unlike peers CRH and Holcim, there is no indication of HeidelbergCement entering the downstream building products sector, which has a lower environmental, social, and governance risk rating.

Operating performance at narrow-moat HeidelbergCement, now known as Heidelberg Materials, continues to track in line with our expectations after reporting a solid third quarter. Similarly to the rest of the building materials sector, significant price increases have been implemented to offset cost pressures, which resulted in quarterly revenue and EBIT growth of 15.7% and 1.5%, respectively. However, unlike peers and despite its new business name, Heidelberg Materials’ financial performance remains the most exposed to heavy building materials, which is energy-intensive, and therefore while top-line performance was in line with its closest competitor, Holcim, Heidelberg Materials' profit growth underperformed. Our full-year operating profit forecasts fall at the midpoint of the quantitative guidance that management specified this quarter. We reiterate our EUR 77 fair value estimate and view shares as deeply undervalued. We believe investment sentiment against cement producers is epitomized by both the company’s depressed 7 times earnings multiple on 2023 earnings and the recent removal of "cement" from its name.

Narrow-moat HeidelbergCement has been unable to offset inflationary pressure to the same extent as some of its peers. Like-for-like revenue grew 11.6% during the first half of the year, driven entirely driven by a double-digit increase in prices. However, despite raising prices to a similar level to its peers, HeidelbergCement could not contain costs to the same extent, resulting in a 12% decline in like-for-like EBITDA. Despite a positive price over cost spread in the month of June, management has downgraded its profit guidance and expects a slight decrease in profit for the full year. We expect that peers' superior management of cost inflation will restrict HeidelbergCement's ability to implement further price hikes, especially as we enter a highly uncertain macroeconomic environment and have therefore revised our profit forecasts downward. We lower HeidelbergCement’s fair value estimate to EUR 77 from EUR 81, to reflect weaker profitability both in the current year and medium term. Shares remain undervalued; however, we view CRH and Holcim as our preferred picks in the sector.

HeidelbergCement is one of the largest manufacturers of building materials in the world, with a significant contribution of revenue from cement production. The cement industry is a notorious contributor of carbon dioxide emissions, which has made the sector uninvestable for many investors due to environmental concerns. HeidelbergCement will accelerate investments into carbon capture and storage technologies to help lower its carbon footprint. However, the benefits are only likely to be realized in the second half of this decade and are unlikely to provide a catalyst for the market to assign a significantly higher multiple on the business in the short term. Unlike peers CRH and Holcim, there is no indication of HeidelbergCement entering the downstream building products sector, which has a lower environmental, social, and governance, or ESG, risk rating.

We’re maintaining our EUR 81 fair value estimate for narrow-moat HeidelbergCement after its capital markets day gave us no compelling reason to materially alter our thesis or long-term forecasts for the company. We are pleased to see the firm increase its level of investments into carbon capture technologies to lower its carbon footprint, which has made the sector uninvestable for many investors due to environmental concerns. However, the benefits are only likely to be realized in the second half of this decade and are unlikely to provide a catalyst for the market to assign a significantly higher multiple on the business in the short term. Most peers have instead opted to perform large acquisitions in other building materials, which don’t exhibit characteristics of an economic moat, to shift their revenue contribution to products that are more environmentally friendly than cement. A larger business mix toward cement has HeidelbergCement trading at a mere price to company-forward earnings estimate of 7 times, based on company compiled consensus estimates, a significant discount to peers. We view shares as undervalued.

HeidelbergCement is one of the largest manufacturers of building materials in the world, with a significant contribution of revenue from cement production. The cement industry is a notorious contributor of carbon dioxide emissions, which has made the sector uninvestable for many investors due to environmental concerns. HeidelbergCement will accelerate investments into carbon capture and storage technologies to help lower its carbon footprint. However, the benefits are only likely to be realized in the second half of this decade and are unlikely to provide a catalyst for the market to assign a significantly higher multiple on the business in the short term. Unlike peers CRH and Holcim, there is no indication of HeidelbergCement entering the downstream building products sector, which has a lower environmental, social, and governance, or ESG, risk rating.

Narrow-moat HeidelbergCement increased revenue 14% in the first quarter driven by double-digit price increases, which were still not sufficient to offset higher energy and transportation costs, resulting in EBITDA declining 25%. We attribute weaker profitability performance compared with CRH and Holcim to those peers’ greater exposure to downstream materials, which are less energy-intensive, as well as larger hedging contracts in place. The first quarter is typically not so significant for full-year results due to construction activity taking place in the warmer months (usually the second and third quarters) and thus weak first-quarter profitability has not affected management’s full-year guidance for strong revenue growth and a slight increase in operating profit. We reiterate our EUR 81 fair value estimate. While HeidelbergCement shares appear undervalued, CRH and Holcim are our preferred picks in the sector.

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.

Narrow-moat HeidelbergCement’s ability to raise prices to offset rising energy and freight costs highlights the sector's strong fundamentals. Fourth-quarter organic revenue and operating profit grew 7% and 2%, respectively. A ramp-up in price increases during the fourth quarter, which included a 13% price hike in December 2021, helped support profitability and highlights the strong demand environment. The ability to raise prices in excess of costs is central to HeidelbergCement’s narrow moat rating, which we believe the market is discounting on environmental, social, and governance concerns over its cement operations. Investors have been rewarded by the strong business performance through dividends and buybacks to the tune of EUR 786 million, a yield of 7% on the current share price. Management is optimistic on the outlook for 2022, expecting strong revenue growth and a slight increase in organic profits despite high energy costs. Demand and the current strong pricing environment are expected to be driven by global infrastructure projects. We reiterate our EUR 81 fair value estimate and view shares as undervalued.

We weren’t surprised by narrow-moat HeidelbergCement’s strong trading update, which largely met our expectations and exceeded company-compiled consensus, and triggered the company to release some preliminary figures. Operating profit grew 12% year over year for the full year, an overproportional increase to the group’s 8% organic revenue growth. The ability to raise prices in excess of costs is central to HeidelbergCement’s narrow economic moat rating, which we believe the market is discounting on environmental, social, and governance concerns over its cement operations. We expect government stimulus will support long-term demand and provide a favorable pricing environment that will help offset cost inflation as well as any potential incremental environmental costs. We maintain our EUR 81 fair value estimate and view shares as undervalued at current levels.

Narrow-moat HeidelbergCement has announced the acquisition of Corliss Resources, one of the largest aggregates and ready-mixed concrete companies in the U.S. Pacific Northwest. We support the acquisition, which increases the quality of the group’s earnings stream due to higher barriers to entry in the United States and our preference for aggregates, which exhibit less cyclicality and lower carbon intensity. We view the transaction multiple of 9 times enterprise value/EBITDA as fair and more favorable than the significant disposal of HeidelbergCement’s U.S. West assets to Martin Marietta. The acquisition will not have a material impact on the financials; however, we believe similar acquisitions will help improve the argument for a multiple rerating if the product mix shifts towards aggregates from out-of-favour cement operations. We maintain our EUR 81 fair value estimate and view the shares as undervalued.