CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for Cementos Pacasmayo S.A.A. (Pacasmayo):
--Foreign currency Issuer Default Rating (IDR) at 'BBB-';
--Local currency IDR at 'BBB-';
--Senior unsecured USD300 million notes due 2023 at 'BBB-'.
The Rating Outlook is Stable.
The ratings reflect the company's solid business position, as the only cement producer in Peru's northern region. This position has resulted in high margins, low leverage and solid liquidity. The small size of the cement market in the north, as well as the difficulty of logistics in this region, has limited the impact of imports and the probability a global company will enter the region in the near future. Further factored into the ratings is the favorable outlook for Peru's cement industry over the medium term driven by Peru's positive macro-economic and business environment.
Solid Business Position:
Pacasmayo is the dominant player in Peru's northern region, where it provides essentially all of the cement sold in the area. During the last 12 month (LTM) period ended in September 2014 the company sold 2.3 million of metric tons, maintaining its historical market share in Peru's cement industry of approximately 22%. Positive for credit quality, the market structure has remained stable in Peru for more than a decade. Pacasmayo's low cost production and extensive distribution network which is customized to the specificities of the Peruvian cement market give the company strong competitive advantages and barriers to entry.
High Margins and growing cash flow generation:
The EBITDA margins of Pacasmayo are among the highest within the industry globally. Pacasmayo's EBITDA during LTM September 2014 was S/.336 million (USD120 million), resulting in an EBITDA margin of 27%. Fitch expects EBITDA margins to remain similar in 2015 and improve to above 27% in 2016 due to operating efficiencies gained at its new plant in Piura. Key factors in sustaining its high margins are access to low-cost energy, proximity of cement plants to limestone reserves, extensive and well-developed distribution network, and a favorable sales mix of bagged (89% of demand) to bulk (11% of demand) cement. The company's cash flow generation benefit from cost savings and increasing production when the new plant starts operations during mid-2015.
Strong Liquidity:
As of Sept. 30, 2014, the company's cash position was S/.665 million (USD229 million) with no short-term debt. The company's cash is committed to finish its new plant and fund other projects while maintaining a minimum cash of at least USD30 million. Pacasmayo's liquidity is strong as a result of its solid cash position and manageable debt payment schedule.
Free Cash Flow to Remain Negative for 2015:
Pacasmayo is expected to generate negative free cash flow (FCF) during 2015 due to the execution of its capex plan in order to complete the new cement plant in the city of Piura. The company anticipates starting operations at Piura during the second half of 2015, with a total investment of approximately USD386 million. USD150 million of capex remains to be spent on the new plant in 2015.
Increased Gross and Net Leverage over the Medium Term:
Pacasmayo's gross adjusted leverage (total debt/ total EBITDA) as of Sept. 30, 2014 was 2.50x due to the USD$300MM bond issuance to refinance short term debt and fund the new Piura plant. Leverage is expected to remain between 2.25-2.50x over the next two years while. Fitch projects net leverage will peak above 1.0x in 2015 as cash is used for capital expenditures but will likely remain below 1.25x.
Continued Growth in Peru's Cement Industry:
The cement and construction industry are very sensitive to economic cycles. GDP growth in Peru increased just 1.8% year over year in 3Q'14, sharply lower than the 5.1% growth seen in 1Q'14 largely due to falling copper exports and a decline in investment. Despite the lower than expected GDP growth in Peru, Fitch forecasts GDP growth to be 3.7% in 2014, which remains above the 'BBB' median. The construction sector is expected to grow at approximately 4.0-5% due to higher employment levels, increasing purchasing power of consumers, and the abundant infrastructure and housing deficits in the country. Cement consumption represents approximately 93% of the construction GDP growth index.
KEY RATING DRIVERS:
Positive Rating Actions: Pacasmayo's rating could be positively affected by significant improvement above expectations already incorporated in its cash flow generation, leverage and liquidity metrics. Any positive rating action is unlikely to occur before the company completes its capital expenditure program.
Pacasmayo's rating could be negatively affected by some combination of the following factors: significant deterioration in Peru's macroeconomic and business environment; increasing competition resulting in the company's EBITDA margin deterioration; or a significant decline in the company's strong liquidity position. Sustained net leverage above 1.50x would be viewed unfavorably by Fitch.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'National Ratings - Methodology Update' (Oct. 30, 2013);
--'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
National Scale Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=967655
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