Heidelberg Materials: Higher Sales Prices Offset Volume Declines and Support Uplift in EBIT Guidance

Narrow-moat Heidelberg Materials HEI reported 2% organic revenue growth during the third quarter, entirely driven by higher selling prices, which managed to offset a decline in volumes. Its weaker sales growth compared with Holcim, during both the third quarter and year to date, can be attributed to Heidelberg’s greater exposure to declining residential construction activity and its lower revenue contribution from North America, where the outlook for construction is more favorable because of recently signed legislation. Management has raised its full-year operating profit guidance by 4.5% at the midpoint to between EUR 2.85 billion and EUR 3.0 billion, as previously communicated in a trading update on Oct. 19. We maintain our EUR 80 fair value estimate and view shares as marginally undervalued.

Higher selling prices for building materials and declining raw material costs supported EBITDA margin expansion of 440 basis points to 24.8%, which translated into 25% like-for-like growth during the third quarter. Geographically, its Western and Southern European segment, which is the group’s largest, was the only region to report a like-for-like revenue decline during the third quarter because of a weak residential sector. While management maintained its full-year like-for-like revenue growth guidance, it is likely to be considerably lower than Holcim’s full-year sales guidance of above 6%.