Opportunity In Peru's Construction Industry

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Includes: CEMTY, CPAC, EPU, GRAM-OLD
by: Dylan Waller

Summary

Peru's construction industry has consistently outperformed the country's GDP growth.

Cementos Pacasmayo Sa, Grana Y Montero S.A.A, and Cementos Limas SA are three companies that one can invest in to gain exposure to Peru's construction industry.

Poor performance in the 1st Quarter of 2015, will be met be full recovery by the end of 2015; the industry is expected to grow by 8% this year.

In a previous article, I mentioned the opportunities of investing in the Ishares MSCI Peru ETF(NYSEARCA:EPU), and gave an overview of the variety of industries that one would be investing in through this ETF. However, for investors who are specifically interested in investing in the growth of the construction industry in Peru, the only option is to invest into individual companies, since the ETF mainly provides exposure to the mining and banking industries of Peru.

The growth of the construction industry in Peru has consistently outperformed Real GDP growth, which is very impressive since Peru has typically led Latin America in real GDP Growth. According to a report by the Andina News Agency, the construction industry is expected to grow by 8% this year, even though growth in the 1st quarter of 2015 has been disappointing. There will be a significant boom is residential and commercial construction, as well as other infrastructure projects.

Some brief advantages that the construction industry has in Peru include the following:

  • 24 large-scale construction projects, valued at $7 billion, will be completed in 2015.
  • President Ollanta Humala announced plans to pave 85% of Peru's roads by 2016. $20 billion will be invested in road projects between 2011 and 2016.
  • The work for Taxes Law, provides favorable conditions for private companies to invest into construction projects chosen by regional and local governments.
  • Potential for rebound from the -2.98% growth experienced in the 1st Quarter of 2015.
  • High incentives for growth, as the construction industry is the leading employer of Peru.

Overall, the development of the construction industry in Peru looks very favorable. For the construction industry, investors can invest in the following three companies:

  • Cementos Pacasmayo Sa(NYSE:CPAC)
  • Grana Y Montero S.A.A(NYSE:GRAM-OLD)
  • Cementos Limas SA(OTCPK:CEMTY)

Financial Performance

Company

P/E Ratio

2012 Net Income

2013 Net Income

2014 Net Income

Cementos Pacasmayo Sa(Thousands of USD)

14

60,960

54,451

63,427

Grana Y Montero S.A.A(Thousands of USD)

12.45

143,487

147,368

121,362

Cementos Limas SA(Millions of Peruvian New Sols)

17.24

397

195

301

Since construction growth has exceeded Real GDP growth in Peru, it is not very surprising to see that two out of the three companies were able to achieve growth in net income in 2014.

  • Cementos Pacasmayo SA had growth in net income of 16.5% in 2015.
  • Cementos Limas SA had a growth in net income of 46.7%.

Moreover, the companies are all attractively valued, with an average P/E ratio of 14.6. When Peru's GDP Growth fell in 2014, and other industries such as the mining and fishing industries suffered, two out of three of these companies were still able to thrive. Overall the construction industry seems to be the less risky industry in Peru, and has high potential for future growth. Moreover, the poor performance in the 1st quarter of 2015, which is expected to rebound, provides an immediate opportunity for returns.

Cementos Pacasmayo Sa(CPAC)

Cementos Pacasmayo SA is a company in Peru that produces, distributes, and sells construction materials. The company has diverse operations in the construction industry, and also owns seven subsidiaries. In addition to the construction industry, the company also operates in the mining industry, with mining projects in four provinces in Peru.

Cementos Pacasmayo SA announced its 1st quarter earning in 2015, with some favorable results:

  • Net Income increased by 31.4%
  • The beginning of the Piura Plant Project has remained as scheduled, with operations beginning in the 2nd quarter of 2015.
  • Gross Margin increased by 43%

However, cement sales volume decreased by 5.6% in the first quarter, due to lower demand from the public sector. This can be attributed to the poor performance of the industry in the 1st Quarter of 2015, which is expected to rebound later this year. Another benefit of this company is the diverse nature of its operations, as it is also heavily involved in the mining industry in Peru. The performance of this industry declined in 2014, but is also expected to rebound; both industries have ample potential, and an investment into both through this company would be wise.

Cementos Limas SA(OTC: OTCPK:OTCPK:CEMTY)

Cementos Limas SA is also an attractive company for investment, as it is Peru's largest cement producer. It was able to grow its position in the industry through its merger with Cemento Andino S.A in 2012, a company involved in the manufacturing and marketing of cement. The company had the largest increase in net income, which was very impressive given the decrease in Peru's GDP growth during that year. The benefits of Cementos Limas include a dominant position in the industry, exposure solely to the construction industry, and high growth despite decreased macroeconomic performance of Peru in 2014.

Grana Y Montero S.A.A(GRAM-OLD)

Despite its poor financial performance in 2014, Grana Y Montero S.A.A is still worth mentioning as a potential investment in this industry. Among the three companies mentioned in this article, the scope of this company's operations are the most diverse.

  • The company participates in construction and engineering projects, which includes projects in the real estate, mining, energy, and construction sectors.
  • The company also significantly invests in infrastructure projects, including three toll roads and Line 1 of the Lima metro.
  • The company is involved in the operation of oil fields and the storage and distribution of hydrocarbon.

The company produced poor results during the 1st Quarter of 2015, when compared to the 1st quarter of 2014:

  • 11.9% growth in Net Revenue
  • 23.5% decrease in Gross Profit
  • EBITDA decreased by 28.4%
  • Net Income decreased by 75.2%

This company presents a strong and unique opportunities for those that believe in the potential for recovery of the construction industry in Peru, as well as general macroeconomic recovery. The company has had a negative return of 56.56%, and is trading extremely close to its 52 week low. Moreover, the sharp decline in net income in the 1st Quarter of 2015 has further attributed to the company's plummeting stock price. Recovery would provide substantial returns for investors, although this stock poses considerable risks.

Conclusion

The construction industry has displayed the most growth in Peru, and has had solid performance despite slowed macroeconomic growth in Peru. The three companies mentioned in this article provide exposure to the construction industry in Peru, which can not be obtained by investing into the Ishares MSCI Peru All Capped ETF. Moreover, many of the companies also operate in other industries that display potential for growth, providing opportunity for investors who prefer a more diversified approach. The construction industry clearly has the most potential in Peru, and in investment into one or more of these companies provides opportunities to meet varying objectives of investors wishing to invest in Peru.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.