Company Overview: CIMIC Group Limited (ASX: CIM) operates in the infrastructure, resources and property markets, carrying on activities such as construction, mining and mineral processing, public private partnerships, engineering and other services, including environmental, telecommunications and operations and maintenance. The Group owns a construction business in the name of CPB Contractors, that includes Leighton Asia and Broad; its mining and mineral processing companies named Thiess and Sedgman; a services specialist UGL; and a public private partnerships arm named Pacific Partnerships. The Group employs around 40,000 people across 20 countries.


CIM Details   
 

Focus on Long Term Business Growth: CIMIC Group Limited (ASX: CIM) is an engineering-led construction, mining, services and public private partnerships group based in Australia. The company has been focused on its key objective of generating sustainable returns for shareholders, with successful delivery of projects and positive outcomes for clients. During the year ended 31^st December 2019, the company delivered a robust operating performance with continued progress in its core operations. During the year, the company withdrew its investment in the Middle East to focus on its core markets in Australia, New Zealand and Asia Pacific. As a result of the one-off impact of the above decision, the company reported a net loss after tax amounting to $1 billion. However, the company believes the decision to exit the Middle East to be advantageous for the business and shareholders in the long run. Moreover, the company has reserved a strong position for itself in the construction market with a diversified business model, delivering cash-backed profit and sustainable returns while effectively mitigating the risks. The company’s portfolio is a mix of activities and geographies that support better balancing of risk sharing contracts.

During FY19, the company reported revenue amounting to ~$14.7 billion, representing marginal a growth of 0.2% on pcp basis. Net loss for the year stood at $1 billion, representing the one-off impact of the decision to exit the non-controlling 45% financial investment in BIC Contracting. The management stated that investments will now be directed towards the core markets of Australia, New Zealand and Asia Pacific, which represent great opportunities for growth. During the year, the company generated operating cash flow amounting to $1.7 billion, with 80% EBITDA cash conversion, excluding BICC. At the end of the period, the business had a strong pipeline of work in hand at $37.5 billion, representing a yoy increase of 2%. During the year, the company was awarded with $18 billion of new work, with numerous contracts secured in the second half. A strong pipeline of work provides good visibility of performance amid the current uncertain times. In FY19, the company has returned $526 million to shareholders in the form of dividends and share buyback. On 3^rd October 2019, the company paid an ordinary interim dividend of 71 cents per share, representing yoy growth of 1.4%.

Moving forward, the business will benefit from a total of $160 billion of tenders (to be awarded/ bid) in 2020 and a pipeline of projects worth $380 billion entering the market in 2021 and beyond. The company is focused on capitalizing on the strong pipeline through an increasing number of Alliance contracts and long-term mining and services contracts coming up. As a result, CIMIC Group will improve the risk profile of its work in hand, further strengthening its business model and ensuring long-term financial health. The management of the company also discussed on the ongoing market conditions due to the outbreak of coronavirus and assured regarding continuous monitoring of risks and adaptability to changing conditions. The company is ensuring good care of the health and safety of its employees and taking the necessary steps to manage the continuity of its operations. 

Key Financial Highlights (Source: Company Reports, Thomson Reuters), *estimated at the time the dividend is paid, NA= Not Applicable

Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of CIMIC Group Limited:

Top 10 Shareholders (Source: Thomson Reuters)

Improvement in Gross Margin and EBITDA Margin: In FY19, the company had a gross margin of 44.1%, higher than the prior corresponding year margin of 42.5% and the industry median of 12.5%. EBITDA margin for the year stood at 14.4%, higher than FY18 margin of 11.4% and the industry median of 5.8%. Net margin, however, went down on the previous year, as a result of the one-off impact of BICC divestment on NPAT.


Key Metrics (Source: Thomson Reuters)
 
Recent Updates:

1. Share Buy-Back: As per an announcement dated 9^th April 2020, the company has bought back a total of 4,671,339 shares for a total consideration of $106.59 million, under the on-market share buyback program.
 
2. CIMIC Group Secures Rail Contracts worth $180 million: On 11^th March 2020, the company updated that UGL, a group company, has been awarded with two rail sector contracts, with work on one of the contracts to carry on for a period of 8 years starting from July 2020. The second contract will comprise the manufacturing of new locomotives over a period of 18 months in Newcastle, NSW. Both the contracts will be generating total revenue of more than $180 million.
 
3. Three Projects for CPB Contractors: In an announcement dated 2^nd March 2020, the company stated that CPB Contractors has been selected by the South Australian Government to deliver three projects under the Port Wakefield to Port Augusta Regional Projects Alliance. The projects are expected to generate revenue of ~$236.8 million for CPB Contractors.
 
4. UGL Secures Oil & Gas Maintenance Contracts: In February 2020, UGL, a CIMIC Group company, secured contracts worth ~$450 million for its clients in the oil and gas sector. The management stated that the contracts secured clearly represent UGL’s strong client relationships and a market leading position in the delivery of services to the oil and gas industry.
 
5. Regional Road Contracts for CPB Contractors: In February, CPB Contractors won projects worth $164 million in revenue, for two major regional highway projects in Victoria and Queensland. The company has a track record of delivering high-quality road projects through CPB Contractors and is committed to working closely with the concerned authorities to ensure safe and efficient delivery of services.

 
Decent Dividend History: The company has a brilliant trajectory of delivering growing returns to shareholders in the form of dividends. During FY19, the company declared a fully franked interim dividend of 71 cents per share, reflecting a growth of 1.4% on the prior corresponding half. However, the company did not declare a final dividend for the year as a result of the one-off financial impact from BICC divestment. We presume that exit from the Middle East will possibly work in favour of better returns for shareholders in the long run, as the company directs its investments and capital allocation towards its core markets. The company remains in a sound liquidity position with undrawn facilities of $3.0 billion at the end of December 2019. Net cash at the end of FY19 stood at $832 million. Moreover, the company sees no impact on its operational liquidity from the expected cash outlay for BICC, with a separate dedicated and additional liquidity facility worth $1.5 billion already available for the same.


Dividend History (Source: Company Reports)


Key Valuation Metrics (Source: Thomson Reuters)

Outlook: The business moves forward with a robust operating environment and is taking care of all the challenges arising due to COVID-19. The company reported a decent increase of 26% in its pipeline of opportunities for FY19 and further expects around $380 billion of projects coming to the market in 2021 and beyond. Excluding the impact of divestment in BICC, the company reported NPAT amounting to $800 million in FY19, which is expected to grow in the range of 1% - 6% in FY20, with FY20 NPAT between $810 million - $850 million. The above guidance came on the back of a strengthened mining market and a strong pipeline of public private partnerships with respect to construction and services.


NPAT Guidance (Source: Company Reports)
 
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation Approach

EV/EBITDA Multiple Based Relative Valuation Approach (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM: Next Twelve Months

Stock Recommendation: The stock of the company gave returns of 17.96% in the past one month and is currently trading below the average of its 52-week trading range of $11.870 - $51.500. The company has continued to deliver a decent financial performance on the back of a set of major projects. The business has been focused on long term growth and will benefit from investments in core markets, going forward. Moreover, amid the uncertain external environment, a strong pipeline of work in hand is what the investors can base their trust upon. We have valued the stock using EV/EBITDA based relative valuation method and arrived at an indicative target price of lower double-digit upside (in percentage terms). Considering the performance in FY19, a diverse business model, a robust pipeline of projects, promising trajectory of dividends paid and long term growth initiatives, we give a “Buy” recommendation on the stock at the current market price of $23.25, down 0.853% on 9^th April 2020.

 
CIM Daily Technical Chart (Source: Thomson Reuters)

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