How is CIMIC, the ASX200 Company, Positioned After Half-Year Results?

Summary

• CIMIC Group with $38.1 billion of work in hand is actively participating in tendering activities. Hong Kong tendering licences have been reactivated.
• HY20 revenue was down $0.8 billion compared to same period last year, as a result of COVID-19. Management believes that core business remains resilient, albeit impacts due to the current situation.
• CIMIC has entered an exclusivity agreement to divest 50% of its stake in Thiess, which is the world’s largest mining services provider.

The fact that engineering-led global infrastructure company, CIMIC Group Limited (ASX:CIM) is on a buyback spree at this point speaks volume about capital allocation of the management, especially amid the crisis. In December last year, the company had announced a share buyback of up to 10% of issued shares.

CIM paid $146.9 million to shareholders after cancelling and repurchasing 1.94% of the issued shares, as of 30 July 2020. Shareholder mood was disturbed early this year after the Group announced a one-off post-tax impact of around $1.8 billion in FY2019.

CIMIC decided to exit BIC Contracting (BICC), which resulted in the one-off post tax impact of approximately $1.8 billion. The company is now emphasising on its core markets: Australia, New Zealand and Asia-Pacific. Since the beginning of this year, the company has released 10 announcements related to contracts and extensions.

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Busines Performance During Half Year 2020

Revenue for the period ended 30 June 2020 was $6.2 billion, down $0.8 billion compared to HYFY19. The business performance update highlighted that its core businesses remain positive, albeit challenges arising from COVID-19 situation, resulting in a temporary delay in new projects and subdued revenues.

Group Executive Chairman, Marcelino Fernández Verdes, noted that mining services business is proving to be resilient. Elliott Advisors (UK) Limited, on behalf of funds, has signed an exclusive agreement to potentially invest for 50% of the share capital in Thiess. After the transaction, Thiess, the world’s largest mining company, will be jointly owned by Elliot and CIMIC. This would enable CIMIC to maintain a strong balance sheet and consistent growth in the mining services business.

In the core construction and services business, it was acknowledged that a number of stimulus packages have been announced by Governments, and PPP pipeline also remains strong. CIMIC’s tendering licence in Hong Kong was also reactivated after two years, and it is now scaling tendering activities.

Mr Verdes also highlighted that the company continues to incorporate technological advancements through innovation and digitisation to build competitive advantages. CIMIC is working on new and emerging technologies, especially in the mining services, industrial services, and construction sectors.

CIMIC is contributing to global research & development and works with IT companies and leading universities. Its new global technology company, Nexplore is undertaking research projects with institutions.

In the half year update, Group CEO, Juan Santamaria, told that the company is adhering to project delivery and cost-efficiency. The company’s tendering activities across the pipeline are 17% higher than the previous year. CIMIC intends to generate ‘sustainable cash-backed profits’ with strict attention to risks and working capital.

Under the announcement, it was reported that CIMIC has work in hand of $38.1 billion after several wins during the half-year. Ventia, its 50:50 partnership, completed the acquisition of Broadspectrum, adding $3.1 billion to work in hand. The combined entity is expected to generate annual revenue of over $5 billion after the acquisition.

Net profit after tax, excluding BICC was $316.6 million in HY20 compared to $366.7 million in the same period during the previous year. EBITDA was $982.1 million, down by $41.7 million from $1.02 billion in HY19. But EBITDA margin was 15.8% against 14.7%.

Operating cash flows of the business were impacted by COVID-19 due to lower revenues and lower net working capital along with seasonal impact. Net capital expenditure for the period was $285.7 million, down 12.5% compared to the same period last year.

The company has debt repayments of $264 million over the next 12 months. Excluding BICC, it had gross debt of $5.3 billion with cash and cash equivalents of $5.35 billion. Likewise, interest expense on debt was $44.1 million, while other finance costs were $74.8 million.

S&P on Credit Rating

Standard & Poor’s affirmed the strong investment grade credit rating of BBB/Stable/A-2 with a stable outlook for CIMIC Group. In 2020, the agency is expecting a revenue decline of approximately 15-20% and EBITDA around mid-to-high single digits compared to the previous year.

Over the next two years, S&P expects capital expenditure in the range of $650 million to $750 million, and share buyback of approximately $150 million. More important, the agency has not considered divestment of Thiess.

On 24 August 2020, CIM settled the day’s trade at $22.410, up by 0.493% from the previous close. The company has a market capitalisation of $7.08 billion and annual dividend yield of 3.18%.

(All currencies in AUD unless or otherwise stated)

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