EMEA Building Materials And Construction A Broad Post-COVID-19 Recovery - July 19, 2021 - S&P Global
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EMEA Building Materials And Construction Authors:
Renato Panichi
A Broad Post-COVID-19 Recovery Pascal Seguier
Arianna Valezano
July 19, 2021Contents Key Takeaways 3 Shape Of The Post-COVID-19 Recovery 4 Rating And Outlook Distribution 16 Key ESG Topics 22
Key Takeaways
Revenue to
Revenue rebound is likely to reboundlevels
pre-pandemic to pre-pandemic
by end-2021. levels by end-2021.
Recovered Recovered
consumer demandconsumer demand and fiscal stimulus
and governments’
sustained strong
stimulus sustained strongvolume
volumegrowth
growthin in
first-half 2021,
first-half and
2021 healthy
and backlogs
healthy are in
backlogs place
for nextfor next couple
couple of years.
of years.
Three-quarters
Three-quarters of negative
of negative outlooks outlooks on speculative-grade
on speculative-grade companies
companies turned turned to stable
to stable. Thisinreflects
first-half
our2021. This
expectation
reflects
of continued solidour expectationin
performance of 2021,
continued
aftersolid performance
a steady recoveryinin2021, after a steady
second-half 2020.recovery in second-half 2020.
Rising raw Rising raw material
material prices
prices are are resulting
resulting in limited
in limited margin margin pressure
pressure due todue to companies’
companies’ focus
focus on operating
on operating efficiency
efficiency
and abilityand ability topass
to quickly quickly
costpass cost inflation
inflation through through
to finaltoproducts
final products because
because of solid
of solid demand.
demand.
Cheap debt and improved business confidence are supporting more capex spending and mergers and acquisitions.
Cheap debt and improved business confidence support more capex spending and mergers and acquisitions. As
As result, we expect no or limited decline in leverage for investment-grade companies in 2021.
result, we expect no or limited decline in leverage for investment-grade companies in 2021.
Carbon leakage should be a limited risk for EU-based cement players in the medium term. The EU's carbon cross-
Carbon leakage should be a limited risk for EU-based cement players in the medium term. The EU's carbon cross-
border adjustment mechanism should mitigate the negative effects of the progressive phaseout of free carbon
border adjustment mechanism should mitigate the negative effects of the progressive phaseout of free carbon
allowances.
allowances.
3Shape Of The Post-COVID-19 Recovery
Construction Volume: Recovery Expected In First-Half 2022
Construction Output By Sector (EC-19) 2015=100
Total construction output Residential construction
Non-residential construction Civil engineering
110
– European construction volume to quickly
recover to pre-COVID-19 levels after a 4.6%
drop in 2020
105
– Civil engineering is the best-performing
100
segment, recovering to pre-COVID-19 levels
in 2021
95
– Non-residential construction is lagging,
recovering to pre-COVID-19 levels only in late
90
2017 2018 2019 2020 2021 2022 2023 2023
Source: Euroconstruct.
5European Construction: 2020 Lost Volume Largely In March-June
– Volume has quickly recovered to pre-crisis levels since July 2020. Volume in January through April 2021 is largely in line
with the pre-COVID-19 level
– Civil engineering works provided resilience during tough pandemic months
Construction Volume Index By Subsegment (2015=100 ) Construction Volume (Index 2015=100)
Total construction Buildings Civil engineering works Total construction 2019 Total construction 2020 Total construction 2021
130 130
120 120
110 110
100 100
90 90
80 80
70 70
Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
20 20 20 20 20 20 21 21
Source: Eurostat. Calendar-adjusted, not seasonally adjusted data.
6Revenues And EBITDA Development In 2020
Most Companies Were Able To Protect Profitability Margins
Revenue And EBITDA Development Of Selected Building Materials
Companies Company Revenues EBITDA EBITDA margin
In %, 2020 forecast/actual if already available compared with 2019
20 Adolf Wuerth
Strabag
Buzzi Unicem SpA
Adolf Wuerth
10
CRH plc
CRH plc
HeidelbergCement Buzzi Unicem
Geberit
Geberit
EBITDA development yoy
0
(16) (14) (12) (10) (8) (6) (4) (2) 0 2 4
Titan Cement HeidelbergCement
Holcim Saint Gobain
Legrand (10) Holcim
Rexel Legrand
(20)
Rexel
Travis Perkins
Saint Gobain
(30)
Strabag
(40) Titan Cement
Revenues development yoy Travis Perkins PLC
Bubble size represents relative revenue 2020. yoy--Year-on-year. Source:
S&P Global Ratings
7Building Materials: Key Assumptions And Risks Around the Baseline
Key assumptions Key risks
Revenues rebound to pre- Persistently high cost inflation may
pandemic levels in end-2021 lead to severe margin decline
Cheap debt and recovered business A quick return to aggressive
confidence support more capex and M&A financial policies
Rising raw material prices result A quick phaseout of free carbon
into limited margin pressure so far allowances may put pressure to EU-
based cement companies
8Construction: Key Assumptions And Risks Around The Baseline
Key assumptions Key risks
A rebound to pre-pandemic levels High raw material costs and labor force
in 2022 shortages result into project setbacks
Public support schemes provide Renewed cash flow volatility due to
significant business opportunities exposure to emerging markets
in the U.S. and Europe
Persistent margin pressure due to A quick return to aggressive
competition and increased raw financial policies
material costs
9The Recovery Is Faster Than We Expected In 2020
– Revenue to recover to pre-COVID-19 levels already in 2021, following a 7% drop in 2020
– Then, in 2022-2023, top-line growth would be at an annual average of 4%, slightly better than GDP
Rated Companies’ Revenue Change Versus Europe’s GDP Revenue Growth Base Case Versus Downside Scenario (Index)
Revenue growth current base-case Europe GDP June 2020 scenario Current base-case scenario
10.0 110
8.0 7.0
6.0 4.9 4.6 105
4.0 4.1 4.0
4.0
2.4
1.7
2.0 100
0.0
%
(2.0) 95
(4.0)
(6.0) (5.0) 90
(8.0) (7.0)
(10.0) 85
2019A 2020A 2021E 2022E 2023E 2019A 2020A 2021E 2022E 2023E
A--Actual. E--estimate. Source: S&P Global Ratings.
10Financial Leverage And Profitability To Rebound In 2022
– Leverage metrics: 2020 deterioration and 2021-2023 recovery are largely due to change in profitability, rather than debt
– Leverage and profitability declines in 2020 were moderate and less than in other sectors, such as manufacturing and chemical
Adjusted Debt To EBITDA Change Adjusted Absolute EBITDA (Index)
Base-case as of end-2020 EBITDA recovery
1.0 110
108
0.6 106
104
0.2 102
100
x
(0.2) 98
96
(0.6) 94
92
(1.0) 90
2019A 2020A 2021E 2022E 2023E 2019A 2020A 2021E 2022E 2023E
A--Actual. E--estimate. Source: S&P Global Ratings.
11Speculative-Grade Companies Suffered More During The Pandemic
– Speculative-grade companies displayed greater deterioration of financial leverage, and their profitability may recover only in 2022
– Investment-grade companies were able to keep leverage under control while improving margin
Adjusted Debt To EBITDA Change By Rating Category Adjusted EBITDA Margin By Rating Category (Index)
Investment grade Speculative grade Investment grade Speculative grade
0.8 102
0.6 102
0.4 101
0.2 101
x
0.0 100
(0.2) 100
(0.4) 99
2019A 2020A 2021E 2022E 2023E 2019A 2020A 2021E 2022E 2023E
A--Actual. E--estimate. Source: S&P Global Ratings.
12Cement And Distributors Performed Better Than Sector Average
– Financial leverage and profitability for construction companies deteriorated significantly in 2020 as result of project stoppages during
lockdowns and idiosyncratic troubles; they are likely to recover only in late 2022
– Instead, distributors and cement companies improved both leverage and profitability, reflecting good cost and price management
Adjusted Debt To EBITDA Change By Sector Adjusted EBITDA Margin By Sector (Index)
General building materials Cement Construction Distributor General building materials Cement Construction Distributor
2.0 103
1.5
102
1.0
101
0.5
x
100
0.0
99
(0.5)
(1.0) 98
2019A 2020A 2021E 2022E 2023E 2019A 2020A 2021E 2022E 2023E
A--Actual. E--estimate.--Source: S&P Global Ratings.
13Corporate Investment To Rebound Significantly In 2021
– Capex contracted 13% in 2020 but is set to grow 23% in 2021, then fall back to annual 2% growth in 2022-2023
– Supportive business confidence and environmental sustainability are key drivers of companies’ investment decisions
IFO Germany Business Climate Index Rated Corporates Capex Change Year On Year
Economic sentiment indicator (left scale)
Construction confidence indicator (right scale) Capex change building materials and construction
120 10 28
24 22.5
5 20
100
16
0
Index: 2015=100
80 12
(5) 8
60 4 1.9 2.1
%
x
(10) 0
40 (4)
(15)
(8)
20 (12)
(20)
(16) (13.4)
0 (25) (20)
2020A 2021E 2022E 2023E
Source: Eurostat, S&P Global Capex--Capital expenditure. A--Actual. E--estimate Source: S&P Global Ratings.
14EMEA Large Building Materials Companies
2021 Shareholder Remuneration To Exceed 2019 Level
Large companies’ shareholder remuneration 2007-2022f
Dividends Share buybacks
7,000
– Limited reduction of dividends and share
buybacks in 2020 due to sector resilience
6,000
during the pandemic and companies’ solid
balance sheets
5,000
4,000 – We anticipate a record volume of dividends in
Mil. £
2021, with share buybacks remaining in line
3,000 with the past two years’ average
2,000
– As result of restored financial policies, we
expect no or limited financial deleveraging in
1,000
2021
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021e 2022f
e--estimate. f--forecast. Companies included: Buzzi Unicem, Compagnie de Saint-Gobain, CRH, Geberit, HeidelbergCement, LafargeHolcim, Legrand, Rexel, Wuerth. Source: S&P Global Ratings.
15Ratings And Outlook Distribution
Outlook Distribution Returned To Pre-Pandemic Level
Rating Distribution
12
19-Dec 20-Dec 21-Jun – Rating distribution has not materially
10
changed during the pandemic
8
6
– Most rating changes were driven by
4
company-specific factors rather than the
2 pandemic
0
A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B
– In June 2021, the outlook distribution
Outlook Distribution returned to pre-pandemic level.
4% 11%
4%
11% 11%
External chart - June 2021 – Most negative outlooks assigned at the
Middle chart - Dec 2020 beginning of the pandemic were
speculative-grade companies that turned
48% Internal Chart - Dec 2019
48% to stable in first-half 2021
78%
Negative Stable Positive – Investment-grade companies continued to
85% display stable outlooks
Source: S&P Global Ratings
17Most Negative Outlooks Turned To Stable In 1H2021
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 Quarter 2
Rating and outlook changes
2019 2019 2019 2019 2020 2020 2020 2020 2021 2021
Buzzi Unicem SpA BBB- BBB- BBB- BBB- BBB- BBB- BBB- BBB- BBB- BBB-
HeidelbergCement AG BBB- BBB- BBB- BBB- BBB- BBB- BBB- BBB- BBB- BBB
Holcim BBB BBB BBB BBB BBB BBB BBB BBB BBB BBB
Titan Cement International BB+ BB+ BB+ BB BB BB BB BB BB BB
BME Group Holding BV -- -- -- B B B B B B B
Ferguson PLC BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+
Quimper AB B B B B B B B B B B
Rexel S.A. BB BB BB BB BB BB BB BB BB BB
Travis Perkins PLC BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+
Winterfell Financing Sarl B B B B B B B B B B
Adolf Wuerth GmbH & Co. KG A A A A A A A A A A
Compagnie de Saint-Gobain BBB BBB BBB BBB BBB BBB BBB BBB BBB BBB
CRH plc BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+
Geberit AG A+ A+ A+ A+ A+ A+ A+ A+ A+ A+
Hestiafloor 2 B B B B B B B B B B
Negative outlook or CreditWatch negative.
Positive outlook or CreditWatch positive.
18Most Negative Outlooks Turned To Stable In 1H2021
Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Quarter 1 Quarter 2
Rating and outlook changes
2019 2019 2019 2019 2020 2020 2020 2020 2021 2021
HT TROPLAST GmbH -- -- -- -- -- -- -- -- -- B-
Infinity Bidco 1 Ltd. B B B B B B B B B B
Legrand S.A. A- A- A- A- A- A- A- A- A- A-
LSF10 Edilians Investments B B B B B B B B B B
LSF10 XL Investments S.a.r.l B+ B+ B+ B+ B+ B+ B+ B+ B B
LSFX Flavum Bidco SL B B B B B B B B B B
Neptune Holdco S.a.r.l. B B B B B B B B B B
Stellagroup B B B B B B B B B B
Tarkett Participation -- -- -- -- -- -- -- -- -- BB-
ACS SA BBB BBB BBB BBB BBB BBB BBB BBB BBB- BBB-
Ferrovial S.A. BBB BBB BBB BBB BBB BBB BBB BBB BBB BBB
HOCHTIEF AG BBB BBB BBB BBB BBB BBB BBB BBB BBB- BBB-
Sarens Bestuur N.V. B B B B B B B B B B
Strabag SE BBB BBB BBB BBB BBB BBB BBB BBB BBB BBB
Webuild S.p.A. BB- BB- BB- BB- BB- BB- BB- BB- BB- BB-
Negative outlook or CreditWatch negative.
Positive outlook or CreditWatch positive.
19Current Rating Headroom Is Generally Adequate
Subsegment Company name Rating Rating headroom at current rating level
Cement Manufacturers Negative outlook Stable outlook Positive outlook
Buzzi Unicem SpA BBB/Stable/A-2
Cementir BBB-/Stable/--
HeidelbergCement AG BBB/Stable/A-2
Holcim BBB/Positive/A-2
Titan Cement International BB/Stable/B
Distributors
BME Group Holding BV B/Negative/--
Quimper AB B/Stable/--
Rexel S.A. BB/Stable/--
Sonepar --/--/A-2
Travis Perkins PLC BB+/Negative/--
Winterfell Financing Sarl B/Stable/--
Construction
ACS SA BBB-/Stable/A-3
Ferrovial S.A. BBB/Stable/A-2
HOCHTIEF AG BBB-/Stable/A-3
20Current Rating Headroom Is Generally Adequate
Subsegment Company Name Rating Rating headroom at current rating level
Construction Negative outlook Stable outlook Positive outlook
Sarens Bestuur N.V. B/Stable/--
Strabag SE BBB/Stable/--
Webuild S.p.A. BB-/Stable/--
General Building Materials
Adolf Wuerth GmbH & Co. KG A/Stable/A-1
Compagnie de Saint-Gobain BBB-/Stable/A-2
CRH plc BBB+/Stable/A-2
Geberit AG A+/Stable/--
Hestiafloor 2 B/Stable/--
HT TROPLAST GmbH B-/Stable/--
Infinity Bidco 1 Ltd. B/Stable/--
Legrand S.A. A-/Stable/A-2
LSF10 Edilians Investments B/Stable/--
LSF10 XL Investments S.a.r.l B/Stable/--
LSFX Flavum Bidco SL B/Stable/--
Neptune Holdco S.a.r.l. B/Negative/--
Stellagroup B/Stable/--
Tarkett Participation BB-/Stable/--
21Key ESG Topics
ESG Risk: Varies Greatly Across The Sector
Above-average exposure to governance risk:
Construction
• Project complexity leads to contingent liabilities and litigation risks
• Bribery, corruption, and anticompetitive practices arising from client interaction
Social risk may be significant because of the high reliance on labor and the importance of safety. Large
companies typically manage well social risk
Environmental risk is limited, as companies execute projects on behalf of asset owners, where the
environmental liabilities reside
Building materials Above-average exposure to environmental risk:
• Climate transition risk is relevant to cement companies given their high CO2 emissions
• Physical risk may be relevant in some geographies
Social risk is not relevant. Safety risk is typically well-managed in developed markets, given regulatory
oversight, policies, procedures, and training.
Governance risk is typically company idiosyncratic. Price fixing/cartel issues have popped up in the industry
(notably cement)
23Environmental Risk: Much More Relevant For Cement Companies
Emissions intensity ratio (tons CO2 scope 1 gross emissions/€1 million revenues)
Distributors Bottom Average Top
~20 ~ 50 ~ 100 GHG emissions are among the key drivers of climate transition risk
in the sector
Cement companies display a carbon intensity ratio 10x higher than
the average for the sector
Construction Bottom Average Top Cement companies’ high intensity ratio may burden their business
~ 20 ~ 60 ~ 100 and financial profiles if they are not able to significantly cut
emissions
The cross-border carbon tax adjustment that the EU is
introducing should limit risk of carbon leakage
General building Bottom Average Top
materials
~ 400
A quick phaseout of the free CO2 allowances may impact
~ 150 ~ 700
EU-based cement players’ EBITDA
Companies will likely have to significantly increase prices to
protect margins ahead of raising CO2 costs
Cement
Bottom Average Top
manufacturers
~ 3500 ~ 4700 ~ 6500 Cement cost is less than 5% of total construction costs,
meaning that a large increase in cement prices would not
translate into significant construction cost inflation
24Analytical Contacts
Arianna Valezano Renato Panichi Pascal Seguier
Milan Milan Paris
+39 0272111226 + 39 0272111215 +33 620368603
arianna.valezano@spglobal.com renato.panichi@spglobal.com pascal.seguier@spglobal.com
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