August 31, 2017 / 5:25 PM / a year ago

Fitch Affirms Cementos Pacasmayo S.A.A. at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, August 31 (Fitch) Fitch Ratings has affirmed the ratings of Cementos Pacasmayo S.A.A. (Pacasmayo) at 'BBB-'. The Rating Outlook remains 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 pricing power, high margins, and an extensive logistical network. The small size of the cement market in the north, as well as the logistical challenges found in this region, have limited the impact of imports and the probability that 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 the need for reconstruction in the northern region of Peru following the devastating flooding during early 2017, and expectations of additional infrastructure projects in Pacasmayo's market. KEY RATING DRIVERS Deleveraging Hampered by Flooding: Fitch projects Pacasmayo to maintain its net leverage position at around 2.2x as lower volumes coincide with increased transportation and other costs primarily related to the heavy rains and flooding during the first part of 2017. The company should exhibit improved credit metrics in 2018 with net leverage around 1.7x due to the reconstruction efforts in its area of influence. Faster than expected improvements in net leverage could occur should higher cement volumes materialize due to the high infrastructure needs in northern Peru. Solid Business Position: Cementos Pacasmayo S.A.A. is the primary cement producer in Peru's northern region, where it provides essentially all of the cement sold. Positive for credit quality, the market structure has remained stable in Peru for more than a decade. Pacasmayo's low cost of production and extensive distribution network, which is customized to the specifics of the Peruvian cement market, give the company key advantages and provide barriers to entry. Furthermore, the high cost and long investment horizon for a competitor to enter Pacasmayo's market are further deterred by the company's low cement utilization rate of around 50% at its combined plants and the company's ability to lower prices and still retain solid profit margins. High Margins: Pacasmayo will continue to benefit from EBITDA margin expansion due to higher production from its low-cost cement plant in Piura over the coming years and lack of need to import clinker for its cement production. Margins have been negatively impacted by the floods across northern Peru leading to increased expenses, but its EBITDA margin should remain above 30% for 2017. Fitch projects EBITDA margins to grow to around 33% by 2018. Key factors in sustaining its high margins include access to low-cost energy, proximity of cement plants to limestone reserves, its extensive and well-developed distribution network, and a favorable sales mix of bagged (89% of demand) to bulk (11%) cement. Hindered Demand Recovery: Peruvian cement consumption in the northern region will be pressured for the remainder of 2017, as private financing for several large projects are delayed. Heavy flooding around Pacasmayo's area of influence should lead to a strong improvement in volumes during 2018 due to reconstruction investments. The ratings incorporate the expectation that Peru's construction sector will continue to grow, in particular the northern region, with the expected expansion of the economy and the continued housing deficit in the country. Reconstruction efforts in the aftermath of devastating floods should be supportive for cement demand DERIVATION SUMMARY Pacasmayo's rating of 'BBB-' is well-positioned relative to peers on each major comparative. A dominate competitive position in Northern Peru and its historically strong credit metrics offset Pacasmayo's lack of geographic diversification and small scale of operations compared to peers CEMEX (BB-), Cementos Progresso (BB+), and Cementos de Chihuahua (BB). No country-ceiling, parent/subsidiary or operating environment aspects impacts the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: -Cement volumes to decline 1% in 2017, increase 5% in 2018, and 3% in 2019. --Price increases remain in line with inflation. --Consolidated EBITDA margin to improve to over 33% in 2018 due increased prices, improved volumes for reconstruction activities and slight reduction in operating expenses. --Capex to decline significantly to around maintenance levels. --Dividend payout to remain at historical levels RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action A positive rating action is unlikely over the near term given Pacasmayo's need to improve its liquidity following its heavy capex cycle and to reduce net leverage. The company's small size and lack of geographic diversification also impede an upgrade, despite the monopoly position it holds in Northern Peru. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action Pacasmayo's ability to delever to around 1.5x by 2017 was negatively impacted by the flooding across northern Peru and the delay in infrastructure projects. Reconstruction efforts to rebuild the vast areas devastated by flooding should materialize into significantly higher volumes and cash flow generation for the company during 2018 and 2019. Should these volumes not materialize or Pacasmayo demonstrates an ability to generate positive free cash flow and improve its liquidity position, a negative rating action could occur. In addition, aggressive future dividends or share buy-back programs over a prolonged period that hamper its capital structure could lead to a negative rating action. LIQUIDITY Fitch expects Pacasmayo will not substantially improve its liquidity position until around 2019, as growing cash flow generation will be met with cash outflows for dividends and other uses. The company's cash position declined to S/ 49 million as of June 30, 2017, compared with S/ 80 million at Dec. 31, 2016 and S/ 158 million at Dec. 31, 2015, due to the funding of its new plant, dividends of S/ 154 million during 2016, cash outflows related to the spinoff of its phosphate project, and sharebuy backs in 2017. Even though the company operates with a low cash balance, Pacasmayo has a very long-term debt maturity schedule. Approximately 60% of its cash is denominated in U.S. dollars. Pacasmayo has no short-term debt, with its USD300 million (S/ 913 million) notes not maturing until 2023. As a result, the company has low refinancing risk. All of Pacasmayo's debt outstanding is related to its bond issuance from 2013, which matures in February 2023. The company has a cross-currency swap contract for its USD300 million debt on the principal. FULL LIST OF RATING ACTIONS Fitch affirms the following ratings: Cementos Pacasmayo S.A.A. --Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BBB-'; --Long-Term Local Currency IDR at 'BBB-'; --Senior unsecured USD300 million notes due 2023 at 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Phillip Wrenn Associate Director +1-312-368-2075 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Secondary Analyst Alejandra Fernandez Director +56 224-99-3323 Committee Chairperson Lucas Aristizabal Senior Director +1-312-368-3260 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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