Company Overview: CIMIC Group Limited is an engineering-led construction, mining, services, and public private partnerships leader that provides services in Australia as well as in various select markets of Asia, the near Pacific, Southern Africa, and the Americas regions. The company intends to expand into other markets that meet its governance, risk, and return requirements, either organically or through acquisition. The organization comprises the construction business CPB Contractors, including Leighton Asia and Broad; services specialist UGL; its public private partnerships arm Pacific Partnerships and its mining and mineral processing companies Thiess and Sedgman.

CIM Details

Focused on Generating Sustainable Shareholder Returns: CIMIC Group Limited (ASX: CIM) is an engineering-led construction, mining and services group focused on generating sustainable shareholder returns by delivering innovative and competitive solutions for its clients. The company provides its services in Australia and select markets in Asia, the near Pacific, Southern Africa, and the Americas. CIMIC Group Limited intends to have a balanced portfolio diversified by market sector, activity, geography, type of client, contract type, volume and duration. Currently, the company seems to be well placed in geographies and markets that are expected to provide a broad range of opportunities for the foreseeable future. The company’s financial policy is to manage net debt to a level that supports a strong investment grade rating. Recently, Moody's Investors Service, a leading credit rating agency, affirmed CIMIC Group Limited’s strong investment grade credit rating of Baa2, with a stable outlook. From 2015 to 2019, the company’s revenue and EBITDA have grown at a CAGR of ~2.6% and ~10.08%, respectively.

Amid COVID-19 pandemic, the company has maintained a disciplined focus on sustaining a robust balance sheet, generating sustainable cash-backed profits, and taking a rigorous approach to tendering, project delivery and risk management. The company has taken several steps that will allow it to continue to meet its clients’ needs over the current challenging period and has established teams to manage the continuity of its operations. Notwithstanding the impact from COVID-19, the outlook across the company’s core businesses remains positive. Moving forward, the company will maintain its focus on collaborative contracting models and long-term mining and services contracts across a mix of activities and geographies to further improving its risk profile and enhance the sustainability of the business.

FY19 Result Highlights: During the year ended 31 December 2019 or FY19, the company undertook a major decision of exiting non-controlling 45% financial investment in BIC Contracting, a company operating in the Middle East. This step allowed the company to focus its resources and capital allocation on the growth opportunities in its core markets in Australia, New Zealand and Asia Pacific. As a result of this decision, the company saw a one-off post tax negative impact of $1.8 billion on its financial statements for 2019. Consequently, the company reported a statutory net loss after tax of around $1.0 billion in FY19.

Excluding the one-off impact from BIC Contracting, the company reported an NPAT of $800 million in FY19, up 3% on last year, driven by the improved returns from operating companies. The company reported revenue of $14.7 billion in FY19 with stable operating profit, PBT and NPAT margins of 8.4%, 7.5% and 5.4%, respectively. Further, the company reported operating cash flow of $1.7 billion with 80% EBITDA cash conversion. During the year, the company returned $526 million to shareholders through dividends and share buyback.

Key Financial Highlights (Source: Company Reports, Thomson Reuters)

The company’s mining and mineral processing business delivered a solid performance, with revenue up 13.4% to $4.5 billion in FY19. Revenue from the construction business was $7.5 billion in FY19, down by 5.4% on the previous year, due to a decline in activity in Hong Kong which was partially offset by contributions from the delivery of transport infrastructure projects in Australia. The company’s operating cash flow was at $1.7 billion in FY19 and EBITDA cash conversion was at 80%, with no increase in factoring.

H1FY20 Highlights: For the first half of FY20, the company reported revenue of $6.2 billion with resilient operating profit, PBT and NPAT margins of 8.6%, 6.9% and 5.1% respectively, supported by business mix and cost efficiency measures. For the period, the company reported EBITDA of $982.1 million and NPAT of $316.6 million.

In H1FY20, the company was awarded $4.9 billion of new work. Over the period, the company saw a temporary delay in the award of new projects due to COVID-19. At the end of H1FY20, the company had work in hand of $38.1 billion, which is equivalent to more than two years of revenue. During the period, the company’s 50:50 investment partnership Ventia completed its acquisition of Broadspectrum. The combined entity is expected to generate annual revenue in excess of $5 billion.

H1FY20 Results Summary (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 80.58% of the total holdings. HOCHTIEF Australia Holdings Ltd. holds the maximum interest in the company at 77.06%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters) 

Key Metrics: For H1FY20, the company reported a gross margin of 47.4%, higher than the industry median of 14.3%. For the same period, the company reported a net margin of 5%, in line with the pcp margin of 5.3%. The company had a current ratio of 1.25x, higher than the industry median of 1.13x, demonstrating that the company is well equipped to pay its short-term obligations. 

Key Metrics (Source: Refinitiv, Thomson Reuters)

Dividend History: In FY19, the company paid an interim dividend of 71 cents per share, up 1.4% YOY, fully franked. For the second half of FY19 and the first half of FY20, the company has not declared any dividend, mainly due to BICC one-off impairment. However, the company continues to focus on delivering returns to its shareholders and it has commenced another buyback of its shares to further remunerate shareholders. It is worth noting that since 2015, the company has returned $2.1 billion to its shareholders through dividends and $0.6 billion through share buyback.

Key Developments:

• Exclusive Negotiations for Thiess Equity Partner: On 29 July 2020, the company announced that it is in advanced negotiations with funds advised by Elliott Advisors (UK) Limited regarding the potential investment by Elliott into 50% of the share capital of Thiess, the world’s largest mining services provider, which would provide joint control of Thiess to CIMIC and Elliott. In the coming weeks, the company will proceed for a share purchase agreement, subject to customary conditions including all regulatory approvals.

• Awarded $2.5 Billion Contract Extension: On 10 July 2020, Thiess was awarded a contract extension by Jellinbah Group to continue to provide mining services at its Lake Vermont Coal Mine in Queensland. This contract extension is expected to generate revenue of around $2.5 billion for Thiess. Under the contract, Thiess will provide a range of autonomous services at the mine, including the implementation of autonomous drilling and semi-autonomous dozer push. 

• UGL Secures $180 Million In Maintenance Services Contracts: CIMIC Group’s services specialist, UGL, secured new contracts and extensions for maintenance and turnaround services contracts in Queensland, Western Australia and Victoria, demonstrating the company’s strong relationships with its clients. This new work is expected to generate a combined revenue of approximately $180 million.

Key Risks: The COVID-19 pandemic poses a significant risk to the company as it is causing a temporary delay in the award of new projects and has slowed down the revenues in certain parts of its business. The company’s existing and future contracts can be impacted by the reduction in demand for global commodities or any fluctuation in the price. Further, the company’s operations are also exposed to the risks related to the changes in economic, political or societal trends, or unforeseen external events and actions.

What to Expect: The company is currently focused on having disciplined capital expenditure, managing working capital and generating sustainable cash-backed profits. The company believes that its ongoing investment in capital expenditure is going to deliver mining operations and job-costed tunneling opportunities. Moreover, the company’s solid work in hand is providing good visibility for the future. At the time of the release of the FY19 results, the company had informed that it expects its FY20 NPAT to be in between $810 million to $850 million, subject to market conditions.  

NPAT Guidance (Source: Company reports)

Around $70 billion of tenders relevant to CIMIC are expected to be bid or awarded for the remainder of FY20. Further, the company expects around $470 billion of projects to come to the market in 2021 and beyond.

Notwithstanding the impact from COVID-19, the outlook across the company’s core businesses remains positive. Moving forward, the company will maintain its focus on collaborative contracting models and long-term mining and services contracts across a mix of activities and geographies to further improve its risk profile and enhance the sustainability of the business. The company expects to release its 3Q FY20 results on 21 October 2020.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative) 

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Over the last six months, the stock of CIM has corrected by 30.62% and is trading near the average 52 weeks trading range. As at 30 June 2020, the company was in a decent liquidity position with gross cash of $4.0 billion and debt repayments of just $264 million due in the next 12 months. The company’s future results are supported by a decent level of work in hand and a positive outlook across the Group’s core markets. We have valued the stock using the Price to Earnings multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). Considering the company’s decent liquidity position, solid work in hand, recently awarded contracts, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $22.60, up by 5.312% on 6 August 2020.

CIM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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