CIMIC On Track For Strong Finish In 2018

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CIMIC has reiterated earnings guidance for 2018, although brokers suspect this could be beaten if the strength to September continues to the end of the year.

-Margins flat as a result of the focus on project delivery and cost discipline
-Significant cash flow provides for M&A opportunities, buyback potential
-Outcome of Hong Kong inquiry likely in next few months
 

By Eva Brocklehurst

CIMIC ((CIM)) is benefitting from the plethora of business in Australian infrastructure construction as well as a strengthening contract mining market. The company has reiterated 2018 net profit guidance in a range of $720-780m.

Revenue excluding joint ventures was up 11% in the nine months to the September quarter and operating earnings (EBITDA) up 13%. Work in hand is $35bn. Margins were largely flat versus the prior corresponding quarter as a result of a focus on project delivery and cost discipline.

Macquarie's estimates are just above the upper end of guidance, reflecting the fact that in each of the last three years CIMIC delivered net profit at the top end of the range. The broker also notes the third quarter tends to be seasonally weaker ahead of a strong finish in the fourth quarter.

A recent pullback on the stock has meant it has fallen below the traditional correlation with earnings per share and Macquarie forecasts 9% growth in earnings per share of the next three years coupled with options on acquisitions.

Credit Suisse also has forecasts at the top end of the guidance range and believes a premium rating for the stock is appropriate given the rate of contract wins, a strong order book and margins.

Yet, the broker reduces the rating to Neutral from Outperform, suggesting top-line growth potential may be lower going forward versus the past few years, as the outlook for transport infrastructure projects is flat and the level of work in hand plateaued around 24 months ago.

Ord Minnett suspects guidance is conservative and likely to be beaten. The broker envisages potential for upgrades to consensus forecasts of around 5% at the 2018 results, should the growth rates achieved in the nine months to September extend into the fourth quarter. This is before any potential acquisitions, which the broker suggests would be well supported by the balance sheet.

UBS likes the company's dominant market position in infrastructure construction and believes there is a high level of leverage to the major investment in infrastructure.

The business is also leaner and more profitable since its restructuring, while significant cash flow provides the ability for bolt-on acquisitions, equity investment in public/private partnerships and share buybacks.

Major Contracts

During the quarter the company announced major projects including the Borkarabelo coal plant in South Africa, the Leinster underground mine in Western Australia and the Encuentro open pit in Chile.

In terms of bidding opportunities the company is in a joint venture with Downer EDI ((DOW)) on the construction of the Parramatta light rail, which will be awarded this year. Other opportunities include WestConnex, Snowy Hydro, Auckland City rail, the Western Sydney airport and NSW inland rail.

Hong Kong

The company's Leighton Asia subsidiary is suspended from bidding for new Hong Kong government work for 12 months, Macquarie understands from government website, relating to alleged defects on part of an MTR rail construction project. A government inquiry is underway and an outcome expected in the next few months.

Macquarie estimates Hong Kong represents around 5-7% of CIMIC's work in hand or around $2bn from the $35bn total. There is no impact on FY15 earnings given the existing backlog in Hong Kong.

FNArena's database shows two Buy and three Hold ratings. The consensus target is $47.94, suggesting -0.7% downside to the last share price.

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