Company Overview: CIMIC Group Limited (ASX: CIM) is a construction, mining, services, and public private partnerships company that offers services across 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 was listed on ASX on 11 December 1962.

CIM Details

New Contracts Awarded: Due to the award of new work, CIMIC Group Limited has witnessed significant improvement in its work in hand position. Over the nine months to September 2021 (9MFY21), CIM was awarded $16 billion of new work, taking its total work in hand (WIH) position to $35.1 billion, up ~17% from $30.1 billion as at 31 December 2020. Some of the contracts awarded in January 2022 are mentioned below:

• CPB Contractors Selected for WHT Tunnelling Works: On 19 January 2022, CIMIC Group Limited notified that its construction business, CPB Contractors, in a joint venture with John Holland, has been selected by the NSW Government for Western Harbour Tunnel work. It is expected that this contract will generate a revenue of around $350 million for CPB Contractors.
• Awarded $100mn Debottlenecking Package Contract: On 18 January 2022, CIM notified that CPB Contractors has been awarded a contract from BHP to deliver the structural, mechanical, piping, electrical and instrumentation package for the port debottlenecking project at Nelson Point, Port Hedland. It is expected that this contract will generate around $100 million for CPB Contractors.
• Secures $296mn in Renewables, Utilities Contracts: On 7 January 2021, CIM informed that its services specialist, UGL, has been awarded several design, engineering, procurement and construction contracts in the renewables and utilities sectors. It is expected that these contracts will generate a combined revenue of more than $296 million for UGL.

Key Highlights for 9MFY21: During 9MFY21, CIM saw decent operational performance, underpinned by the performance of Australian Construction and Services.

• Increase in Revenue: CIM reported total group revenue of $10.9 billion in 9MFY21, up ~9.2% on pcp.
• Resilient Margins: Despite the impact of COVID-19 pandemic, CIM reported EBITDA, PBT and NPAT margin of 9.6%, 5.1% and 4.3%, respectively.
• Increase in Operating Cash flow: For Q3FY21, CIM reported operating cash flow pre-factoring of $52 million, up $286 million from Q3FY20.

5-Year Financial Summary (Source: Analysis by Kalkine Group)

Decent Dividend History: CIM has a decent track record of rewarding shareholders via dividends and buybacks. Notably, from 2016 to 2020, CIM has returned $1.7 billion to its shareholders in the form of dividends and $0.7 billion in share buybacks. For H1FY21, the company has paid an interim dividend of 42 cents per share (20% franked). At the CMP of $16.94, the company’s annual dividend yield stood at 5.95%, higher than the five-year average dividend yield of 2.79%.

Dividend Trend (Source: Analysis by Kalkine Group)

Key Metrics: Net margin for H1FY21 stood at 4.5%, up from 2.4% in H1FY20. ROE for H1FY21 stood at 20.7%, up from 14.2% in H1FY20.  Current ratio for H1FY21 stood at 1.14x, down from 1.25x in H1FY20. Cash Cycle for H1FY21 stood at 93.6 days, down from 186 days in H1FY20.

Liquidity Profile (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 81.35% of the total shareholding, while the top four constitute the maximum holding. HOCHTIEF Australia Holdings Ltd. and The Vanguard Group, Inc. are holding a maximum stake in the company at 78.58%  and 0.76%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis y Kalkine Group)

Key Risk:

• COVID-19 Uncertainties: The company is exposed to the risks related to COVID-19 related shutdowns, which could impact its operations and cause a delay in the award of new projects.
• Foreign Currency Risk: The company is exposed to the risks related to the impact of foreign exchange rate movements as it could impact the company’s financials.

Outlook: Due to various stimulus packages announced by the governments in the company’s core construction and services markets, the outlook remains attractive across CIM’s core markets. Looking ahead, the company is focused on executing its strong level of work to generate cash flow and returns. For FY21, the company expects its NPAT to be in the range of $400 million - $430 million, subject to market conditions and excluding any one-off items.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

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 six months, the stock has corrected by 19.19% and is trading lower than the average 52-week price level band of $15.28 - $26.48. The stock has been valued using P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight premium to its peers, considering the positive outlook for CIM’s core markets and award of recent contracts, and pipeline of work. For the purpose of valuation, peers such as Service Stream Ltd (ASX: SSM), Monadelphous Group Ltd (ASX: MND), Downer EDI Ltd (ASX: DOW), etc., have been considered. Considering decent results in 9MFY21, award of new contracts, track record of rewarding shareholders via dividends and buyback, decent outlook, current trading level, and indicative upside in valuation, we give a “Buy” rating on the stock at the current market price of $16.94 as on 20 January 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

CIM Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

---

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website unless those persons comply with certain safeguards, procedures, and disclosures.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.