Ord Min $40 - buy Morning $35 Cr Suisse $35 - outperform Macq $32.49 - neutral UBS $30.41 - neutral
CIMIC Group Limited (CIM)
Update: Cimic Bites the Bullet and Exits Problematic Middle East.
FVE Reduced 3% to AUD $35. Recommendation: Accumulate Change: No Change
We reduce our fair value for no-moat Cimic to AUD $35 from AUD $36 due to Middle East exit costs. Time value of money is a partial offset. Following a strategic review of its investment in BIC Contracting, Cimic announced its intention to exit the failed venture to focus on core APAC regions. The company will recognise a hefty one-off post-tax impairment of AUD 1.8 billion in 2019, including an AUD 700 million, or AUD 2.16 per share, post-tax cash portion to be captured in 2020 to cover financial guarantees made to BIC. The market responded swiftly and harshly to the disappointing news, including cancellation of the final 2019 dividend, with the shares down 20% since the announcement. We see limited long-term negative implication in the withdrawal.
At AUD 28.65, Cimic shares have fallen 45% from plus AUD 51.00 highs mid last year, and trade at an 18% discount to fair value. The consequent 4-star rating is our first better-than-neutral rating in at least four years. And at the current price, the implied 4.6% fully franked 2020 yield is useful if not world-beating. The key potential catalyst for a share price re-rate is ongoing growth in work-in-hand. In recent notes we highlighted the number and magnitude of new contracts announced by Cimic for the less than three months to September. These totalled just over AUD 7.5 billion, more than double the magnitude announced for the entire six months to June, and equivalent to approximately half a year's group revenue. Maintenance of that trend would do the trick.
Our fair value estimate equates to an unchanged 2023 EV/EBITDA multiple of 4.9. We still forecast a 9.9% five-year EBITDA CAGR to AUD 3.0 billion by 2023, adjusting the 2018 start year for adoption of AASB 16 Leases which brings operating leases on balance sheet. Underpinning that we assume a five-year revenue CAGR of 9.0% to AUD 22.7 billion by 2023. If this ultimately proves too aggressive on the revenue side, there is some scope for margins to offset.
CIM Price at posting:
$28.85 Sentiment: Buy Disclosure: Held
