FREE Stock in Focus: DMCI Holdings Inc. (DMC) – 3 May 2024 by AP Securities

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Summary of Broker’s Recommendation

Cement is a losing game. CHP has been spewing red ink since 2022, and has posted losses in 13 out of the 32 quarters since 2016. The company cited high electricity costs and intense competition from imported cement as the reasons for the losses. The low profit margins in Philippine cement manufacturing also resulted in the exit of the Lafarge-Holcim group from the country when they had to sell business units to get their merger approved. The Philippine operations of Lafarge was acquired by the Aboitiz family and has also been a weight on their bottom line since 2022.

Time will tell if CHP’s vertical integration into the Consunji business will be able to make DMC profitable. We currently have a Hold recommendation on DMC with a Target Price of P12.02 per share.

Analysis and Opinion

Consunjis venture back to cement via CHP

After many months of speculation, the Consunji family has finally secured an agreement to acquire CHP via the purchase of its parent company, Cemex Asia Southeast Corp. (CASEC) from Cemex Asia B.V. The agreed price of $305.6-Million will be payable in cash upon closing of the transaction.

The resulting ownership structure of CASEC is as follows: DMC (56.8%), SCC (11.1%), and DACON Holdings (32.1%). CASEC owns 89.86% of CHP, and part of the purchase agreement is for DACON Holdings to conduct a tender offer for CHP’s remaining public float of 10.14%.

No quarry for us, thank you

CHP disclosed that closing of the transaction will be subject to approval from the Philippine Competition Commission (PCC), which will necessitate the disposal of CHP’s 40% stake in APO Land & Quarry Corp. and Island Quarry & Aggregates Corp. Cemex (the Mexican parent company) disclosed that the quarrying stake will be sold for an aggregate price of $140-Million to undisclosed buyers.

Discounted to market price

The transaction values CHP at $340.1-Million or P19.5-Billion at a USDPHP exchange rate of 57.4090. This is at a 23.8% discount to CHP’s current market capitalization of P25.6-Billion and implies that the likely tender offer price is around P1.45/share. That means that the transaction was already priced-in in the early days of the speculative run-up in CHP.

CHP fits well into the Consunji-verse

We have previously stated that CHP will synergize well with the other operating units of DMC, with CHP potentially supplying DMC’s engineering, procurement and construction (EPC) business and its DMCI Homes unit, while SCC can supply the power-hungry cement manufacturing of CHP with electricity. SCC has also been making moves to tap into Semirara Island’s limestone reserves in a bid to diversify from coal, and this could potentially supply CHP with raw materials.

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