CIMIC Group Limited

CIM Details

Key Business Update: CIMIC Group Limited (ASX: CIM) is an engineering-led construction, mining services, and public-private partnerships company focused on building a portfolio of complementary capabilities across assets, infrastructure, and resources to amplify insights.

• Selection for Sydney Metro: As announced on 22 December 2021, CIM’s CPB Contractors, in a joint venture (JV) with Ghella, is selected by the NSW Government to deliver the boxes and tunnelling work for Western Sydney Airport Station. The $1.8 billion contract, funded by NSW and the Australian government. The contract is expected to generate circa $1.35 billion in revenue for CPB Contractors.
• Response to Speculative Articles on CIM: On 20 December 2021, CIM clarified on the speculative article published on CIM’s exit from the BIC Contracting (BICC) and Middle East region. Since the sale of BICC, CIM has worked with it to ensure payment to circa 2,720 workers. 1,900 people received payments, payment is in process for 400 people, and payment for remaining 420 people is being pursued, amounting to US$7 million.
• Settlement on West Gate Tunnel: As announced on 17 December 2021, The JV between CPB Contractors and John Holland (CPBJH JV) has reached a commercial settlement of various contractual disputes. The settlement terms deliver $1.9 billion contributions from the Victoria government and $2.0 billion from Transurban to ensure project completion.

9-months FY21 Financial Performance

• Top Line Update: Group revenue surged by 9.2% PcP to $10.9 billion, and revenue surged by 6.8% PcP to $7.1 billion. Revenue growth was supported by Australian Construction and Services.
• Bottom Line Update: NPAT, PBT, and EBITDA margins stood resilient at 4.3%, 5.1% and 9.6%, respectively, despite COVID-19 containment restrictions in Q3FY21.
• Cash Flow Position: Operating cash flow (pre-factoring) surged by $351 million PcP with the completion of factoring strategic reduction. The factoring balance shrunk from $976 million as of 31 December 2021 to $495 million as of 30 September 2021.
• Liquidity Position: Net debt stood at $754 million with $481 million unwinding of factoring and $187 million dividend payment in YTD movements.

H1FY21 Financial Performance

• Top Line Update: Revenue stood at $4.613 billion, up by 4.8%, primarily driven by strong top-line growth in Australian Construction and Services. Group revenue surged by 10.6%, substantially supported by Ventia and the acquisition of Broad-spectrum on 30 June 2020.
• Bottom Line Update: EBITDA increased by 5.1% and stood at $464.5 million. NPAT clocked $208 million, up by 1.3%. Company margins stood resilient at 10.1% (EBITDA Margin) and 4.5% (NPAT Margin).
• Cash Flow Position: pre-factored operating cash flow improved by $65 million YoY, and pre-factored free cash flow increased by $166 million YoY. Net capital expenditure decreased by $73 million YoY.
• Liquidity Position: Net debt for the period stood at $272.2 million, with the unwinding of $243 million of factoring movement in H1FY21. Cash and equivalent liquid assets stood at $3,159.7 million as of 30 June 2021.

H1FY21 Financial Snapshot, Analysis by Kalkine Group

Key Risks and Challenges:  CIM is exposed to the risks related to the fluctuations in the forex market, potentially affecting the company’s financial health. The labour shortage has been a significant hurdle for industrial and construction companies

Outlook: The company is focused on executing its strong level of work to generate cash flow and returns. For FY21, the company estimates to clock $400 - $430 million in NPAT, subject to market conditions and excluding any one-off items. The IPO of Ventia is estimated to generate cash proceeds of around $30 million (after cost) for CIM.

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

Source: 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: The stock of CIM gave a negative return of ~32.931% in the past year. The stock is currently trading lower than the 52-weeks’ average price level band of $15.280 - $27.510. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price low double-digit (in percentage terms). The company might trade at a slight premium to its peers, considering recent contracts’ awards, work pipeline, and improving margin. For valuation, a few peers like Monadelphous Group Ltd (ASX: MND), Service Stream Ltd (ASX: SSM), NRW Holdings Ltd (ASX: NWH), and others are considered. Given CIM’s improved contact pipeline, favourable track record of shareholders’ return, favourable outlook, risk associated to payment of 2,720 workers, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $16.680, down by ~0.060% as of 24 December 2021.

CIM Daily Technical Chart, Data Source: REFINITIV

Service Stream Limited

SSM Details

FY21 Financial Performance: Service Stream Limited (ASX: SSM) provides services to infrastructure-based industries, mainly telecommunications and utilities.

• Top-line Update: In FY21, total revenue stood at $804.2 million, down by 13.4% YoY. Comdain infrastructure revenue clocked $319.8 million, up by 11%. Metering services, new energy & inspection services revenue slipped by $4.2 million YoY due to COVID-19 disruptions.
• Bottom-line Update: EBITDA from operations in FY21 clocked $80.1 million, down by 25.9% YoY. The EBITDA figure excludes $5.0 million in restructuring and M&A costs. Adjusted NPAT stood at $38.9 million, down by 33.8% YoY.
• Financial Position: Net cash stood at $15.6 million, down by $3.9 million, maintaining a solid EBITDA to operating cash flow before interest and taxes (OCFBIT) conversion rate of 99.0%.

FY21 Financial Snapshot, Analysis by Kalkine Group

Key Risks and Challenges: SSM witnessed an unprecedented disruption in the COVID-19 pandemic, including energy disconnections and moratoriums. SSM continues to expect some risks to its near-term performance. Any advance change in technology may create business challenges in the market in which it operates.

Outlook: The acquisition of Lendlease services is expected to deliver considerable improvements in SSM’s financial and earnings profile. Service stream estimated Pro-forma FY22 EBITDA of $120 - $125 million. The company is optimistic that its future growth will be supported by its blue-chip client base. In addition, the company has a combined backlog of contracted works of over ~$5.8 billion.

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

Source: 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: The stock of SSM gave a negative return of ~56.026% in the past one year. The stock is currently trading lower than the 52-weeks’ average price level band of $0.735 - $1.905. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price low double-digit (in percentage terms). The company might trade at a slight discount to its peers, considering COVID-19 disruptions in energy disconnections and falling margin. For valuation, few peers like CIMIC Group Ltd (ASX: CIM), Monadelphous Group Ltd (ASX: MND), Saunders International Ltd (ASX: SND), and others are considered. Given synergies from recent acquisitions, low financial leverage, decent outlook, current trading levels, key risks associated with the business, and upside indicated by valuation, we give a “Speculative Buy” recommendation on the stock at the closing market price of $0.790, down by ~1.251%, as of 24 December 2021.

SSM Daily Technical Chart, Data Source: REFINITIV

Note: The purple line reflects the RSI (14-day period)

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.

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