CIMIC Group Limited

Company Overview: 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. CIMIC Group 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

Growing Work in Hand Position: During the nine months to September 2021 (9MFY21), CIMIC Group Limited (ASX: 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 2021. In Q3FY21 alone, the company was awarded $5.6 billion of new work. Some of the new contracts that the company has been awarded in November and December 2021 are as follows:

• Secured Two Mining Services Contracts in Queensland: On 7 December 2021, CIM notified that its mining and mineral processing company, Thiess, has secured two mining services contracts, including a three-year contract with Austral Resources at the Anthill Copper Project and a 12-month contract extension to its existing contract with BHP Mitsubishi Alliance (BMA). These contracts are expected to generate combined revenue of approximately $200 million.
• CPB Awarded Road Projects in South Australia: On 3^rd December 2021, CIM announced that its construction business, CPB Contractors, has been selected by the South Australian Government to perform duplication works on the Main South Road and the Victor Harbor Road in South Australia. CPB Contractors is expected to generate around $314 million in revenue from this contract.
• UGL Awarded a Long-term Maintenance contract With Chevron Australia: On 4^th November 2021, CIM informed that its services specialist, UGL, has been awarded a multi-year maintenance contract with Chevron Australia for works in the Pilbara region of Western Australia. It is expected that this contract will generate revenue of around $40 million per annum for UGL.

Key Highlights for 9MFY21: During 9MFY21, CIM reported decent operational performance, despite facing COVID-related shutdowns in New South Wales, Victoria, and New Zealand, demonstrating the resilience of the company’s business and effective management of operations throughout the pandemic.

• Rise in Revenue: CIM reported total group revenue of $10.9 billion in 9MFY21, up ~9.2% on pcp, underpinned by the growth achieved in Australian Construction and Services.
• Increase in Operating Cash flow: For Q3FY21, CIM reported operating cash flow pre-factoring of $52 million, up $286 million from Q3FY20.
• Slight Reduction in NPAT: NPAT for 9MFY21 stood at $303.1 million, down by ~1.1% on pcp.

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

Key Metrics: EBITDA margin for H1FY21 stood at 10.1%, slightly up from 10% 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 81.33% 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:

(Source: Analysis by Kalkine Group)

Dividend Paying History: CIM has a decent track record of rewarding shareholders via dividends and buybacks. During the second half of FY20 (H2FY20), CIM returned to a dividend payout ratio of 60-65% and paid a final dividend of 60 cents per share. Further, the company returned $281 million of cash to shareholders through share buy-back in FY20. For H1FY21, the company has paid an interim dividend of 42 cents per share (20% franked). At the CMP of $17.93, the company’s annual dividend yield stood at 5.68%, higher than the five-year average dividend yield of 2.79%.

Dividend History (Source: Analysis by Kalkine Group)

Ventia IPO Update: On 26 October 2021, CIM had lodged a prospectus with AISC for the initial public offering (IPO) of ordinary shares in Ventia Services Group Limited (Ventia). It is expected that the IPO will provide Ventia with the financial flexibility to pursue further growth opportunities and will help in raising new capital to repay debt. In an update provided on 15 November 2021, CIM notified that the IPO will proceed at a final offer price of $1.70 per share and the IPO offer size will be $438 million, representing 30% of Ventia’s share capital. On completion of the IPO, CIM will retain a 32.8% stake in Ventia, which is subject to a voluntary escrow period.

Key Risks:

• Foreign Currency Risk: CIM is exposed to the risks related to the fluctuations in the foreign exchange currency rates, as it could impact the company’s financials.
• COVID-19 Uncertainties: The company is exposed to the risks related to the uncertainties surrounding the COVID-19 pandemic, as it could cause a delay in the award of new projects and impact the availability of skilled labour, which could impact the company’s performance.

Outlook: The IPO of Ventia is expected to result in cash proceeds of around $30 million (after costs) for CIM. Further, the IPO will result in a statutory pre-tax gain of approximately $60 million for CIM. 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 ~10.84% and is trading lower than the average 52-week price level band of $16.86 - $27.51. 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 Service Stream Ltd (ASX: SSM), Monadelphous Group Ltd (ASX: MND), Downer EDI Ltd (ASX: DOW), etc., have been considered. Considering CIM’s improved work in hand position, decent results in 9MFY21, 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 closing price of $17.93, down by 1.049% as on 16 December 2021.

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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