Morgan Stanley upgrades Holcim to “overweight” on cash flow, margin leadership

Investing.com -- Morgan Stanley (NYSE:MS) has upgraded Holcim (SIX:HOLN) to "overweight" from "equal weight," raising its price target to SFr 55, in a note dated Tuesday.

Shares of the building material company were up 5.5% at 03:32 ET (07:32 GMT).

The move follows Holcim’s spin-off of its North American business, Amrize, which has simplified the company’s structure and enhanced capital allocation flexibility.

According to analysts, Holcim’s free cash flow conversion from EBITDA reached 57% in 2024 on a pro forma basis. Management aims for conversion above 50% through 2030. 

Morgan Stanley projects average free cash flow to EBITDA conversion of 56% between 2026 and 2028, ahead of peers such as Heidelberg (ETR:HDDG), Buzzi, Cemex, and Vicat (EPA:VCTP). 

With projected bolt-on M&A spending of CHF500 million annually and a 50% dividend payout, leverage is expected to decline steadily, allowing for additional growth or shareholder returns.

The report highlights Holcim’s consistent earnings growth, driven by a value-over-volume strategy and disciplined cost controls. 

EBIT is forecast to grow at an 8% CAGR from 2025 to 2030. The company’s decarbonization leadership is cited as a key margin driver. 

Measures include reducing clinker ratios, increasing alternative fuel usage, and participating in government-funded carbon capture projects. 

Branded products ECOPact and ECOPlanet, which accounted for 26% and 31% of 2024 sales respectively, are targeted to surpass 50% of total sales by 2030.

Despite cyclical pressures, Morgan Stanley sees limited downside risk. Europe, contributing 56% of projected 2025 revenues, shows cement production in Germany, the U.K., and France still 25% below 2019 levels. 

Falling interest rates may stabilize residential construction. In Mexico, representing 11% of Holcim’s revenues, construction activity has softened following the completion of major infrastructure projects. 

However, Holcim’s strong position and 38% EBITDA margins in Latin America help offset regional weaknesses.

Valuation metrics show Holcim trading at a 7.4% free cash flow yield and 7.4x EV/EBITDA for FY26e, comparable to European peers but at a discount to Swiss industrials averaging 18x EV/EBITDA.

In a bull case scenario, which assumes 7% revenue CAGR and 10% EBIT growth through 2030, Morgan Stanley sees over 50% upside potential, with shares trading at a 5% free cash flow yield.

Regionally, Latin America delivers the highest EBITDA margins, nearing 40%, while Asia, Middle East & Africa contribute 25% of projected revenues. 

Capex is expected to rise to 7% of revenues by 2030, with CHF6.6 billion of unallocated cash flow available through 2030, excluding potential asset sales or additional leverage.