Shares in CIMIC Group (ASX:CIM) have rallied strongly after releasing their full year results. However the result was mixed, so how much longer do we hang in there?
About CIMIC Group
CIMIC Group is an infrastructure, mining, services and public private partnerships group. The Company has businesses in Construction (CPB Contractors and Leighton Asia), Mining and Mineral Processing (Thiess and Sedgman), operation and maintenance services (UGL), Public Private Partnerships (PPPs) and engineering.
Overview of FY18 Results and Guidance
CIM reported FY18 Net Profit After Tax (NPAT) of $780.6m (+11% on FY17). This was at the upper end of the $720-780m guidance range provided by the Company. It was also broadly in line with consensus estimates of $782m. CIMIC’s FY18 result was characterised by mixed divisional performance. The Mining & Mineral Processing division significantly beat expectations. However the Construction and Services divisions performed below expectations. The NPAT result was also supported by a reduction in corporate losses. These were mainly as a result of lower losses from the Middle East operations.
The Mining & Mineral Processing division reported an improvement in margin in 2H18. The division benefitted from new contract wins and extensions. It was also coupled with robust mining production (coal, base metals, iron ore) and rising strip ratios.
The Company reported Work-in-Hand increases across all of its core divisions, with the strong tendering pipeline expected to continue. CIM is also currently pursuing other major projects. These include the Cross River Rail PPP project, Inland Rail in Queensland, North East Link PPP in Victoria, and North-South Corridor in Singapore.
Importantly, the top end of FY19 guidance, which implies NPAT growth of 7.6%, is an acceleration on the 4% NPAT growth achieved in FY18. It is highly likely to be achieved, given that the upper end of guidance has been a good guide in recent years. FY18 was the 4th consecutive year that CIM has delivered NPAT at top end of its guidance range.
Key Strengths
1. Favourable Macro Conditions Remain
The Company continues to benefit from Australian transport infrastructure project development activity, which is underpinned by a supported macro environment in Australia. In particular, the Federal government continues to be supportive of infrastructure. This is given the large infrastructure backlog and the requirement for upgrades and new infrastructure. All of this being driven by strong population growth in Australia. The pipeline of infrastructure work in Australia continues to be revised higher. This is driven by projects such as The Western Harbour Tunnel and the Melbourne Airport Railway Link.
2. Strong Balance Sheet
The Company has sufficient net cash levels to fund Merger & Acquisition opportunities, capital management (including share buyback programs and/or increasing dividend payments) as well as Public-Private Partnerships (PPPs). Further, any debt-funded acquisitions at reasonable multiples are likely to be EPS accretive. This is because the cost of debt has fallen.
Overall Fundamental View
CIM shares are currently trading at the upper end of its historical trading range. This reflects the stellar performance in the Mining & Mineral Processing division, the pipeline of work in the Australian Construction business, net cash position and the market overcoming fears pervading the industry last year.
Having said that, there are two factors likely to cap any further upside in the share price. Firstly, the Company’s Hong Kong business exhibited a decline, as it is coming off recent peak levels of activity. This detracted from the overall performance of the Construction division. Secondly, margin improvement in the Services division, which was expected in the FY18 result, has not yet materialised.
Charting View
The share price is congesting under $50, which is a strong support level. For the moment, it looks like it wants to break through that. If that were to occur, then CIM could quickly put on another few dollars. However, if we don’t get through $50 in the next few days, then that may be a sign that the share price will drift back to the lower $40’s again.
Michael Gable is managing director of Fairmont Equities.
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