Caribbean Cement’s Earnings Softens Due to Higher Costs & Royalty Fee Payments

• Caribbean Cement Company Limited continues to deliver positive growth in earnings, aided by robust demand for cement despite an overall increase in costs, but the rate of growth has slowed. 
• For the first quarter ended March 31, 2022, the company reported a year-over-year 4.2% rise in unaudited net profit. This performance was driven by a 14.2% increase in revenue, which continues to reflect strong demand in the domestic market and CCC’s capacity to supply the local market. 
• Note; however, CCC’s bottom line was tempered by increased costs. For the review period, Carib Cement saw an 18.1% (or J$559.28Mn) increase in direct costs, 8.3% (or J$48.03Mn) rise in operating costs, and a 403.6% expansion in other expenses (which consist of demolition expenses, management fees, royalties, COVID-19 expenses, amongst others). Direct cost continues to be impacted by higher fuel and electricity costs as well as high shipping costs, while other operating expenses rose owing to the royalty fee that CCC now has to pay to Cemex, the ultimate parent company. 
• In December 2021, the majority of shareholders approved CCC’s Master Services Intellectual Property Agreement with CEMEX, CCC’s parent company, where the agreement sees the company receiving corporate service support in key areas. With the agreement now in effect, earnings will continue to be impacted by the added costs. However, over the medium term, the company should also be able to leverage the competencies of its parent company, per the royalty agreement to reduce costs and improve the efficiency of its operations. 
• Going forward, Carib cement should continue to see positive results despite the risk of increased costs. Demand from major infrastructure projects by the government, and new and ongoing commercial and residential developments, should all support domestic demand and product sales. Moreover, as the tourism sector continues its gradual recovery, the resumption and increase in building and renovation projects should also support the demand for CCC’s products. 
• Notwithstanding, there are downside risks to CCC’s prospects, namely rising fuel, electricity, and shipping costs, as well as threats from new strains of the COVID-19 infection. 
• CCC’s stock price has increased by 0.63% since the start of the calendar year. The stock closed Thursday’s trading session at $70.30 and currently trades at a P/E of 14.0x relative to the main market energy, industrials, and materials sector average of 18.9x.

 (Sources: CCC’s Financials & NCBCM Research)