CIMIC Group Limited

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

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