NCB Capital reduces price target for Carib cement stock

Large brokerage NCB Capital Markets Limited reduced its price target for Caribbean Cement Company shares by 25 per cent, as the company moved to implement royalty fee payments to ultimate parent Cemex, with effect from January 1, 2022.

NCB Capital also describes the CCC stock as a hold.

The royalty fee approved by Caribbean Cement shareholders last December 7 will result in the Rockfort, Kingston-based company paying out up to 4.0 per cent of annual revenue to Cemex. The fee is seen by the market as a tax on the cement maker’s future profits.

NCB added that the rise in the central bank’s benchmark or policy interest rate in recent months has also affected Caribbean Cement’s cost of capital and therefore, the potential return to investors.

“Given the change in Bank of Jamaica benchmark rates, and the planned application of royalties by the parent company, Cemex, we have updated our discounted free cash flow-to-equity valuation model to reflect the impact of the higher risk-free rate on our discount rate and the application of the assumption of 4.0 per cent royalties on net sales to assess the impact on our price target estimate,” the brokerage said in its latest analysis of the CCC stock.

It added that although the agreement said the royalty fee was “up to” four per cent, it took a conservative stance and assumed the full 4.0 per cent in its valuation model.

The new price target of $82.29 is nine per cent, up from the current stock price of $72.83, but down from $110 in September, but .

“The drop in the stock price reflects negative investor sentiments following the announcement of the proposal for CCC to pay royalties to its shareholders. This stock had not traded in the $70 region since April,” said NCB Capital. “Some investors are uncomfortable with the fact that there was no previous indication that royalty payments would be required for Cemex’s expertise, while others are concerned about the impact that the royalties would have on CCC’s cost structure and the company’s overall performance,” the brokerage said.

For the September 2021 quarter, Caribbean Cement earned profit of $43.7 million, compared to $1.2 billion in 2020. Its earnings were negatively affected by heavy rainfall and maintenance.

“Notwithstanding, the demand for cement remains robust owing to the private construction boom and ongoing public development projects,” said NCB Capital. “With the scheduled maintenance behind it, the company is in a better position to meet these demands. Consequently, the fourth quarter should see a rebound in its top and bottom lines.”

business@gleanerjm.com