bottom fishing in cyclicals

VALUEx Vail – June 2011

Dante Albertini
dante@mdsfi.com
 Boom and Crash in Housing….
P’s Q’s

A 34% decline to return trend line.

Tilson May/08
housing starts 2001-2010 14.5m
household formation: 1.3m/yr 13.0m
Integrated building materials + global footprint…

CEMENT READY-MIX AGGREGATES

96m ton/yr capacity 2,000 plants 376 quarries
78 cement plants
50 Countries
223 Land distribution Centers / 71 Marine Terminals
1906 : Cementos Hidalgo (Monterrey, MX) --
1985 : consolidation and exports. LZ becomes ceo $275m sales.
11m ton cement

1989 : acquisition Cementos Tolteca (2nd in Mexico) 10th in the world

1992 : initiates international expansion (Spain) $1.9b $2b sales
94-99: Venezuela, Panama, DR, Colombia, Philipines, Egypt $2.5b 65m ton cement
$4b sales
2000 : USA (Southdown) $2.8b 1st in USA
01-02: Nicaragua, Thailand, Puerto Rico $0.8b 81m ton cement
2005 : RMC (20 european markets) $5.8b 98m ton cement
2007 : Rinker (aggregates in USA) $15.3b 97m ton cement
 2010 (b) mexico usa europe other total
sales 3.4 2.5 4.8 3.4 14.1
ebitda 1.2(34%) -0.0(-2%) 0.4(9%) 0.8(23%) 2.3(16%)
a fallen angel…

shareholders %own
longleaf 12%
dodge&co 6%
Zambrano & family 10%

US$ b 2q07 Jun 11

Mkt Cap -
31.7 8.4 73%

Debt 19.1 17.0

EV 50.8 25.4
p/e 13.3 (-)
p/b 2.2 0.5
ev/assets 1.1 0.6
 Untimely big acquisitions
US$ b Pre RMC Rinker Post
(2005) (2007)
purchase price 6.5 15.3
Sales 10.8 7.4 6.0 24.2
cement 8.2 1.5 0.6 10.3
ready mix 2.4 4.4 2.8 9.6
aggreg. 0.2 1.5 2.6 4.3
 ebitda margin

roic

Lafarge
normalized numbers:
sales: $21b (-15%, +45%)
Ebitda: 20%
Roic: 8%
 Mexico

Big Moat (franchise):

60% market share Quick number…
Distribution network mex ebitda $1.3b x 7 =$9.1b
con la leche se paga la vaca…
10yr summary (US$b)
10yr summary (US$ b)

E D
AG
E R
L E V
V ER
O
 debt

Total debt Kd
Dec-08 $21.8b 4.1%
 debt

Total debt Kd
Dec-08 $21.8b 4.1%
Apr-11 $18.2b 7.0%
 debt

Total debt Kd
Apr-11 $18.2b 7.0%
VALUATION

multi-angle 2D pics for 3D realityà

 1. nav (liquidation)
volume multiplo Valor
cement capacity 53.2m $140 - 180 $7.5 – 9.6b
(emerging
countr.)
cemento capacity 42.9m $200 - 210 $8.6 – 9.0b
(develop. countr.)
ebitda ready-mix $1.1b 7.0x – 7.2x $7.7 – 7.9b
+ aggregates
net debt -$16.5b
$7.3 - 10.0b
Per share $7.0 – 9.6
 2. ebitda multiple
producto Capacity % utilization Ebitda
cement 97.0m 85% - 90% $2.9 - 3.2b
ready-mix 93.4m 85% - 90% $0.5 – 0.6b
aggreg. 280m 85% - 90% $0.5 – 0.7b
Other $0.2 – 0.2b
ebitda (20%) $4.1 – 4.6b
7.1x – 7.3x $28.8 – 33.6b
Net debt -$16.5b
$12.3 – 17.1b
Per share $11.8 – 16.4
 3. acquisitions + organic growth

CX 1999 7x ebitda $13.0b

acquisitions + Invested $29.0b
organic.g 2000-’10 capital
Net debt -$16.5b
Value $25.5b
Value per share $24.0
 4. normalized dcf
Mexico 19%
USA 24%
Europe 38%
Others 19%

2011 2012 2013 Norm

sales +11% +10% +15% +15%
FCF aft capex.m 400 600 1,200 2,450
PV (Ks 12%) $16b
Per share $16
PV (Ks 10%) $20b
Per share $19
 Valuation Summary
yields
3y -4% 6% 13% 27% 31% 40% 44%
5y -3% 4% 7% 15% 18% 22% 25%
7y -2% 3% 5% 11% 12% 16% 17%

1 1 2 2 4 4 3
 a low expectations time arbitrage…
yields
3y -4% 6% 13% 27% 31% 40% 44%
5y -3% 4% 7% 15% 18% 22% 25%
7y -2% 3% 5% 11% 12% 16% 17%

…plus
growth

1 1 2 2 4 4 3
restructuring timeline
Strike
s

$20

$13.6

$11.3
 risk: equity value dilution
9,000

8,000 assumption:
7,000 value per share $16 (before)
6,000 Refinancing $8B:
5,000 •50% debt @10% (Kd base < 6%)
4,000 •50% equity @ $8
3,000

2,000

1,000

0
2011 2012 2013 2014 2015 2016 2017 > 2018

apr-11
bef dilution post
value p. sh 16 13.2
s.o. 1.04 0.50 1.54
value equity 16.7 20.2
debt net 17.0 13.0
value firm 33.7 0.5 33.2