CIMIC Group Limited

Company Overview: CIMIC Group Limited (ASX: CIM) is an engineering and construction company that works across the lifecycle of assets, infrastructure, and resources projects. It mainly provides integrated solutions, which include designing, planning, manufacturing, construction, maintenance, rehabilitation, and decommissioning of projects. The company’s construction business is comprised of CPB Contractors, Leighton Asia, and Broad. Its mining and mineral processing companies include Thiess (50% investment) and Sedgman.

CIM Details

Key Takeaways from H1FY21 Results:

• Rise in Revenue: For the half-year ended 30 June 2021, CIM reported total group revenue (including revenue from Joint ventures and associates from continuing operations) of $7.1 billion, up 10.6% on the previous corresponding period (pcp), supported by the growth in Ventia following the acquisition of Broadspectrum on 30 June 2020.
• Improvement in Free Operating Cash Flow Pre-Factoring: CIM’s free operating cash flow pre-factoring grew by $166 million in H1FY21, reflecting normalisation of new project awards, reduction in capital expenditure and finance costs.
• Decline in Net finance Cost: Net Finance Costs for H1FY21 declined by 21.7% to $247.1 million, driven by lower average debt levels and decreased use of working capital instruments.
• Rise in NPAT: NPAT for H1FY21 stood at $208 million, up by 1.3% on pcp.

FY20 Results Highlights: During the year ended 31 December 2020, CIM had reported a statutory revenue of $11.4 billion, down from $14.7 billion in FY19, impacted by the COVID-19 pandemic. One of the important highlights of FY20 was the 50% sale of Thiess, providing CIM additional capital to pursue future growth opportunities. For FY20, the company reported a statutory NPAT of $620.1 million, up from the loss of $1,039.9 million in FY19.

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

Dividend Track Record: In the past five years (2016 to 2020), it has returned $2.4 billion to shareholders through dividends (+$1.7bn) and share buybacks (+$0.7bn), demonstrating its focus on rewarding shareholders via dividend and distribution. For H1FY21, the company has paid an interim dividend of 42 cents per share. At CMP of $19.59, the company’s annual dividend yield stood at 5.30%, higher than the five-year average dividend yield of 2.79%.

Dividend Trend (Source: Analysis by Kalkine Group)

Key Metrics: EBITDA margin for H1FY21 stood at 10.1%, slightly up from 10% in H1FY20. NPAT margin for H1FY21 stood at 4.5%, slightly down from 4.7% 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 81.51% 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 0.75%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Latest Developments:

• CPB Contractors to Work with ARTC for Inland Rail South Civil Works: CIM’s construction business, CPB Contractors, was recently selected, in joint venture, to work with the Australian Rail Track Corporation (ARTC) for inland rail south civil works. CPB will help in the development of 306 kilometres of new track formation comprising bulk earthworks, drainage, bridge/viaduct structures, materials and logistics management.
• CPB Contractors Awarded Western Sydney Airport Airside Works: CPB Contractors, with its joint venture partner Acciona, was awarded Western Sydney Airport airside works contract. This contract is expected to generate revenue of approximately $265 million to CPB Contractors.
• UGL Won Contract Extension with Transport For NSW: CIM’s services specialist company, UGL, was awarded a contract extension by Transport for NSW. Under the contract, UGL will increase the size of the Mariyung Fleet, and will also be involved in the installation of an additional transformer at the Maintenance Facility at Kangy Angy, on the NSW Central Coast. It is expected that this contract will generate revenue of more than $100 million for UGL.

Key Risks:

• COVID-19 Uncertainties: The COVID-19 pandemic and associated restrictions could cause a delay in the award of new projects and could impact the availability of skilled labour, which could impact the company’s performance.
• Change in Macro Economic Scenarios: Changes in economic, political or societal trends could cause delay in the delivery or award of contracts, thereby impacting the company’s overall performance.

Outlook: 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. Looking ahead, the company is focused on managing its working capital and generating sustainable cash-backed profits. For FY21, the company expects its NPAT to be in the range of $400 million -$430 million.

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 one month, the stock has corrected by 5.39% and is currently trading lower than the average 52-week price level band of $16.86 - $27.510. 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 award of recent contracts, pipeline of work, and modest outlook.  For the purpose of valuation, peers such as Monadelphous Group Ltd (ASX: MND), Service Stream Ltd (ASX: SSM) Downer EDI Ltd (ASX: DOW), etc. Considering the company’s improved financial performance in H1FY21, decent pipeline of work, expected benefits of numerous stimulus packages announced by governments, modest outlook, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $19.59 as on 23 September 2021, 1:30 PM (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

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