Fitch Ratings has affirmed
The Rating Outlook for the Foreign and Local Currency IDRs has been revised to Negative from Stable.
Pacasmayo's ratings reflect the company's leading business position as the main cement producer in
The Negative Outlook reflects the challenges Pacasmayo faces to deleverage in the next 12 to 18 months. The current scenario of high inflation and interest rates as well as political turbulence further delaying infrastructure investments are negative headwinds that could continue to pressure cement sales further down during 2023.
Key Rating Drivers
Solid Business Position: Pacasmayo's rating is supported by its position as the primary cement producer in
Competitive Cost Position: The company's cost position benefits from the proximity of its plants to its quarries, electrical supply contracts, purchasing the majority of its coal locally, and its capability to use natural gas. The company's competitive advantages are expected to widen in the near term, given increased clinker capacity by mid-2023. Further, Pacasmayo's competitive cost position is complemented by a favorable sales mix of bagged (90% of sales) and bulk cement (10% of sales), which results in higher average prices.
Declining Volume Trends: After the strong volume recovery noted during 2021, Pacasmayo's volume decreased 4.4% during the first nine months of 2022 mainly due to moderation in sales volume of bagged cement for self-construction, as well as decreased sales for reconstruction-related projects. Volumes should close YE 2022 at around 5% below 2021, but still higher than 2019 due to the strong rebound in demand. Home improvement demand should slowdown in 2023 considering political turbulence, less government spending and persistent high interest rates and inflation, which will likely negatively impact disposable income. The fundamentals for cement demand in
Pressures on FCF and Leverage: Pacasmayo's net leverage is expected to increase to 3.1x in 2022 and 3.0x in 2023 from 2.6x in 2021, driven primarily by higher capex disbursements with the construction of a new kiln (
Projected leverage metrics are consistent with a 'BBB-' rating within Fitch's broader building materials universe. However, when compared to regional cement producers of approximate scale, Pacasmayo's leverage of 2.5x-3.0x is high.
Shareholder-Friendly Policies: Fitch forecasts for pre-dividend FCF is neutral in 2022, increasing to PEN166 million in 2023 and PEN292 million in 2024. These estimates assume dividend payments of around
Extensive Distribution Network: Pacasmayo operates a broad distribution network that is customized to the specifics of the Peruvian cement market. This provides the company with key advantages and additional barriers to entry to its market. Pacasmayo developed one of the largest independent retail distribution networks for construction materials in
Derivation Summary
Pacasmayo's 'BBB-' rating reflects its position as the primary cement producer in
The company's rating is constrained by its lack of geographic diversification and scale of operations compared with global cement players such as
Pacasmayo's projected net leverage is higher than
Key Assumptions
Fitch's Key Assumptions Within The Rating Case for the Issuer
Consolidated cement, concrete and precast volumes sold of around 3.4MT in 2022 and 3.2MT in 2023;
Consolidated EBITDA of approximately PEN489 million in 2022 and PEN513 million in 2023;
Capex of PEN218 million in 2022 and PEN190 million in 2023;
Dividends of around PEN180 million per annum in 2022 through 2023.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Materially larger scale and geographic diversification;
A record of net debt to EBITDA below 1.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Increased competition;
Expectations of sustained net debt/EBITDA meaningfully above 2.0x;
A material reduction in CFO expectations, which is not compensated by a reduction in dividends;
Additional debt-funded dividends would be viewed negatively.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Demonstrated Access to Local Market Credit: Pacasmayo's liquidity has been pressured by its negative FCF generation. This should remain a weakness in the company's credit profile during 2023, and likely to improve only from 2024 on due to improved CFFO generation. Fitch believes the company benefits from enhanced financial flexibility as part of Grupo Hochschild, one of
The company has demonstrated sound funding access. On
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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