Stocks’ Details

CIMIC Group Limited

Update on BICC Strategic Review: CIMIC Group Limited (ASX: CIM) provides construction, mining and operation and maintenance services to the infrastructure. The company has recently announced that it has completed an extensive strategic review of BIC Contracting, wherein it initiated a confidential M&A process. After the evaluation, the company has decided to exit the region and to focus its resources and capital allocation on growth opportunities. CIMIC Group Limited will recognise a one-off post-tax impact of approximately $1.8 billion in 2019 and an expected cash outlay net of tax of around $700 million during 2020.

UGL Secures $180m in Mining Sector Contracts: CIMIC group’s company, UGL has recently secured contracts of approximately $180 million to provide maintenance, shutdown and project services in the mining sector and to provide multi-discipline services for Alcoa across the Wagerup and Pinjarra sites. For the third quarter ended 30 September 2019, the company generated operating cash flow of $282 million and free operating cash flow of $38.3 million.


FY19 Financial Performance (Source: Company Reports)

What to Expect: The company is focused on delivering returns to shareholders, and its robust balance sheet provides flexibility to pursue strategic growth initiatives. CIM expects to report NPAT of around $800 million for 2019 and will announce its 2019 financial results on 4 February 2020.

Valuation Methodology: Price/Earnings based Multiple

Price/Earnings based Multiple (Source: Thomson Reuters)

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

Stock Recommendation: As per ASX, the stock of CIM gave a return of 7.47% in the past three months and a return of 2.91% in the past one month. The stock is also trading very close to its 52-weeks’ low level of $27.80, offering a decent opportunity for accumulation. For the half-year ended 30 June 2019, gross margin of the company stood at 44.8%, higher than the industry median of 12.5%. This indicates that the company is managing its costs well and is able to convert its revenue into profits. In the same time span, ROE of the company stood at 15.2% as compared to the industry median of 5.2%. Considering the returns, trading levels, higher gross margin and ROE and decent growth opportunities, we valued the stock using Price/Earnings based valuation and have arrived at a target upside of lower double-digit (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $28.030, down by 19.868% on 23 January 2020, owing to a recent update on BICC review and impact on 2019 results.  
 

Downer EDI Limited

Downer Awarded Contract at Meandu Mine: Downer EDI Limited (ASX: DOW) designs, builds and sustains assets, infrastructure and facilities and it is the leading provider of integrated services in Australia and New Zealand. The company has recently announced that it has been awarded with a five-year contract of approximately $600 million to provide mining and related services at the Meandu Mine. During FY19, revenue of the company went up by 6.6% to $13.4 billion, and EBITA witnessed a rise of 8.6% and stood at $850.2 million.

‘
 FY19 Financial Performance (Source: Company Reports)

Growth Opportunities: The company has recently revised the guidance for NPATA for FY20 and expects it to be around $300 million, which is down from the previous guidance of $365 Mn. This downgrade is majorly due to the underperformance in engineering, construction and maintenance, lower revenue in EC&M construction and delayed project commencement in mining. DOW will continue to grow its service-oriented businesses in the upcoming years and has stated that its cash performance is not expected to be as strong as it was in the previous years. The company expects to report cash conversion of approximately 40-50% of EBITDA for FY20.

Valuation Methodology: Price to Earnings Based Multiple

Price to Earnings Based Multiple (Source: Thomson Reuters)

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

Stock Recommendation: As per ASX, the stock of DOW gave a return of 27.18% in the past six months and a return of 7.36% in the last one month. The stock is also trading close to its 52-weeks lower levels of $6.450, proffering a decent opportunity for accumulation. Over the span of 4 years, the company has witnessed a CAGR of 16.2% in revenue and a CAGR of 13.19% in gross profit. Considering the returns, trading levels, CAGR in revenue and gross profit and decent growth opportunities, we valued the stock using Price to Earnings based multiple method and have arrived at a target of higher single-digit upside (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $7.170, down by 18.057% on 23 January 2020, owing to its recent contract at Meandu mine and revised guidance for FY20. 
 

Boral Limited

Improved Earnings from Continuing Operations: Boral Limited (ASX: BLD) is engaged in the manufacture and supply of building and construction materials. As on 23 January 2020, the market capitalization of the company stood at ~$5.94 billion. During FY19, the company delivered improved earnings from continuing operations and reported an increase of 4% in revenue to $5,801 million. Owing to its decent financial performance, the Board paid full-year dividend of 26.5 cents per share.


FY19 Financial Performance (Source: Company Reports)

What to Expect from BLD: The company expects NPAT to be ~5-15% lower in FY2020 relative to FY2019, owing to its lower earnings and higher depreciation charges. The company has also identified certain financial irregularities inventory levels and raw material and labour costs in its North American Windows business. This will result in a one-off impact on EBITDA of US$20 million to US$30 million. 

Valuation Methodology: Price/Cash Flow based Multiple

Price/Cash Flow based Multiple (Source: Thomson Reuters)

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

Stock Recommendation: As per ASX, the stock of BLD gave a return of 12.67% in the past one month and is inclined towards its 52-weeks high level of $5.735. During FY19, gross margin was in line with the previous year and stood at 33.7%. In the same time span, EBITDA margin witnessed a slight improvement on the prior year and went up to 16.1% from 15.5% in FY18. Considering the returns, trading levels and improvement in EBITDA margin, we have valued the stock using Price/Cash Flow based relative valuation method and arrived at a target of single-digit growth (in percentage terms). Hence, we recommend a “Hold” rating on the stock at the current market price of $5.060, down by 0.197% on 23 January 2020. 

 
Comparative Price Chart (Source: Thomson Reuters)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.