Company Overview: CIMIC Group Limited (ASX: CIM) is primarily involved in the operation of engineering-led constructions, mining, servicing, and public private partnerships (PPPs). The company provides its services across the lifecycle of assets, infrastructure, and resources projects. CIMIC Group Limited is comprised of construction business CPB contractors, mining and mineral processing companies Thiess (50% investment) and Sedgman, services specialist UGL and public private partnerships arm Pacific Partnerships. The company’s strategy is focused on building a portfolio of complementary capabilities across assets, infrastructure and resources to amplify insights.

CIM’s Details

Long-term Outlook Supported by The Backlog of Services and Maintenance Work: CIMIC Group Limited (ASX: CIM) is an engineering-led construction, mining, services, and public private partnerships leader focused on delivering innovative and competitive solutions for its clients. As on 6 May 2021, the company’s market capitalisation stood at ~$6.00 billion. Despite the challenges created by the COVID-9 pandemic, CIM ended FY20 with positive results in profit, revenue and cash generation, and a modest outlook for 2021. During the year, the company sold 50% interest of its mining and mineral processing company – Thiess, and retained the remaining 50%, reflecting the ongoing strategic importance of Thiess to CIM’s business. The company has a decent track record of returning cash to its shareholders via dividend and share buyback event over the past five years.

Looking ahead, the company is focused on taking a rigorous approach to tendering, project delivery and risk management. Further, it is focused on managing working capital and generating sustainable cash-backed profits. Due to the significant role of infrastructure in the economic recovery from the COVID-19 pandemic, CIM is optimistic about the outlook for its activities. Moreover, the stimulus packages from Government in construction and services is also supporting the outlook. With attractive tailwinds from the COVID-recovery infrastructure spending and a backlog of services and maintenance work, CIM seems well placed in growth markets.

5-year Financial Summary (Source: Refinitiv, Thomson Reuters, Company Reports)

FY20 Results Highlights: During FY20, the COVID-19 pandemic caused a temporary delay in the award of new projects and slowdown of revenues across CIM’s activities, both domestic and overseas. Despite the delay in the award of new projects, CIM was awarded new work of $7.4 billion in FY20. CIM reported statutory revenue of ~$11.4 billion for FY20, down from $14.7 billion. EBIT, PBT and NPAT margins stood at 10.3%, 8.7% and 5.4%, respectively. For FY20, the company reported statutory NPAT of $620.1 million, up from the loss of $1,039.9 million in FY19. During the year, the company also returned $281 million of cash to shareholders through its share buy-back event.

FY20 Results (Source: Company Reports)

Decent Performance in Q1FY21: For Q1FY21, the company has reported revenue of $3.4 billion, consistent with the revenue of Q1FY20, which had no material impact from COVID-19 pandemic. Further, the company reported improved EBITDA, EBIT and PBT margins of 10.0%, 7.0% and 5.5%, respectively, underpinned by cost reduction initiatives. Over the quarter, CIM was awarded new work of $3.5 billion, bringing work in hand (WIH) to $30.2 billion. Free operating cash flow pre-factoring increased by $106 million in Q1FY21, compared to Q1FY20. NPAT for Q1FY21 stood at $100 million. On 26 March 2021, CIM signed a $1.4 billion three-year syndicated performance bond facility, which supported the company’s ability to meet the significant number of projects coming through the pipeline. As at 31 March 2021, the company had cash of $3,432.7 million and gross debt of $3,647.7 million.

Q1FY21 Revenue & Free Operating Cash Flow Pre-Factoring (Source: Company Reports)

Key Metrics: For FY20, the company reported EBITDA margin of 18.5%, up from -3.5% in FY19. NPAT margin for FY20 stood at 5.4%, up from -7.1% in FY10. Current ratio for FY20 stood at 0.99x, up from 0.68x in FY19, demonstrating that the company has improved its ability to pay short-term obligations.

Past 5-year Financial Performance for Year Ending 30 June; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 81.73% of the total shareholding, while the top four constitutes the maximum holding. HOCHTIEF Australia Holdings Ltd. and The Vanguard Group, Inc. are holding a maximum stake in the company at 78.58% and 0.78%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Dividend Track Record: From 2016 to 2020, CIM has returned $2.4 billion to shareholders through dividends (+$1.7bn) and share buybacks (+$0.7bn). During FY20, CIM returned to dividend pay-out ratio of 60-65%. Despite the impact of COVID-19 pandemic in FY20, the company declared a final dividend of 60 cents, payable on 5 July 2021 with an ex-date of 11 June 2021. Hence, the company has a decent track record of paying dividend to its shareholders over the last five years. At CMP of $19.320, the company’s annual dividend yield stood at ~3.10%, higher than the five-year average dividend yield of ~2.795%.

Dividend Trend (Source: Company Reports)

Leighton Asia And Broad Construction Secured $100 million Contracts: Recently, CIM’s construction company, Leighton Asia, was awarded a contract by Singapore’s Land Transportation Authority, in joint venture with Bintai Kindenko Pte Ltd, to replace the electrical services and systems for the existing Central Expressway and Fort Canning Road Tunnels. The wholly owned subsidiary of CPB Contractors, Broad Construction (Broad) was also awarded a contract by the West Australian Government to deliver the expansion of the Casuarina maximum security prison, located to the south of Perth. It is expected that these contracts will generate approximately $100 million in revenue.

Broad Construction to Deliver $100 million Ferny Grove Central: Broad Construction was also selected by the Honeycombes Property Group and joint-venture partner MaxCap Group to deliver Brisbane’s Ferny Grove Central development. It is expected that this project will generate revenue of approximately $100 million for CPB Contractors.

Sedgman And CPB Contractors Secure $100 million in Contract Wins: In March 2021, CIM’s minerals processing company, Sedgman was awarded a contract by QCoal to design and construct a tailings dewatering facility at the Byerwen mine in Central Queensland. Broad Construction was also awarded a contract by the Queensland government to deliver stage two of the Yarrabilba State Secondary College. Both these contracts are expected to generate $100 million in revenue.

Key Risks: The company is exposed to the risk of potential financial market disruption due to COVID-19 pandemic. Further, it is also exposed to the risk of delay in the award of new projects. Changes in economic, political or societal trends can also impact the company’s performance.

Outlook: Looking ahead, the company is focused on progressing its core activities of construction, mining and mineral processing, services and public private partnerships (PPPs), while generating sustainable returns for its shareholders. For FY21, the company expects its NPAT to be in the range of $400 million-$430 million, subject to market conditions. The guidance represents a growth range of 8% to 16% on 2020 proforma underlying NPAT basis. Further, the company is committed to rewarding shareholders through a consistent dividend payout ratio of 60 to 65% of NPAT. The outlook is supported by the various stimulus packages announced by governments in core Construction and Services markets.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by 22.87% and is trading lower than the average 52-week price level band of $16.86 - $28.72, offering a decent opportunity for accumulation. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peer average EV/sales (NTM trading multiple), considering the improved margins in Q1FY21, decent pipeline of work, and modest long-term outlook. We have taken peers like Lycopodium Ltd (ASX: LYL), Monadelphous Group Ltd (ASX: MND), and Service Stream Ltd (ASX: SSM), which comes under construction & engineering sector. Considering the company’s decent work in hand, its track record of rewarding shareholders through dividend and share buyback, expected growth in FY21 NPAT, current trading level and valuation, we give a “Buy’ recommendation on the stock at the current market price of $19.320, up by 0.103% as on 6 May 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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