EUR 850.00 For Business Accounts Only

Morningstar | Flurry of Late 2018 Contract Wins Bolster our Cimic Growth Assumptions. FVE Upgraded to AUD 34.50.

We increase our fair value estimate for no-moat Cimic by 8% to AUD 34.50 per share. Approximately two thirds is due an increase to our EBITDA growth assumption, and the balance simply reflects time value of money. For the group overall, we now assume EBITDA grows at a CAGR of 4.6% over the next five years to AUD 1.90 billion by 2022. This betters our prior assumption of a 3.2% CAGR to AUD 1.75 billion and reflects rebalancing in assumed growth drivers following recently announced contract wins. We increase the five-year revenue CAGR for CPB Contractors to 4.6% from flat prior, lifting forecast 2022 revenue from the segment by 27% to AUD 9.5 billion. This is partially offset by a decline in the revenue CAGR for Thiess Mining Contractors to 3.5% from 5.3%, reducing forecast 2022 segment revenue by 8% to AUD 3.75 billion. We make no change to the UGL services segment assumptions which comprise less than a fifth of group revenue.

We haven’t altered segment margin assumptions, but the revenue mix-shift to lower-margin CPB contracting earnings reduces our group midcycle EBITDA margin assumption to 11.5% from 12.0%. CPB Contractor revenue comprises just over half of group revenue at a forecast EBITDA margin of 9.5%, while higher 20% EBITDA margin Thiess mining revenue comprises a lessor one fourth.

Since our October 2018 note, Cimic has announced a number of large contract wins. These have been coming at a combined average magnitude of approximately AUD 600 million per week, triple a five-year historical average nearer AUD 200 million, volatility notwithstanding. An increase was anticipated and necessary in support of our revenue growth assumptions, but the mix has been more highly skewed to contracting. Of the AUD 7.0 billion in newly announced Cimic contracts over the past three months, AUD 3.6 billion or 50% is in contracting, AUD 1.4 billion or 20% is mining, and AUD 1.9 billion is in services and other.

Larger recent CPB Contractor awards include AUD 2.0 billion for the WestConnex M4-M5 Link and AUD 1.4 billion for the Sydney Metro and Southwest. These run for five and six years, respectively. Significant UGL servicing contracts include AUD 750 million for the Navy’s Landing Helicopter Dock fleet in Sydney, but this is to run over 15 years. Thiess was awarded a AUD 1.2 billion Mt Arthur coal mining contract in the Hunter from BHP in late October, running for five years. We had been keeping a weather eye on the level of work-in-hand, which Cimic most recently reported at AUD 35.0 billion, lower than AUD 35.7 billion just over a year ago. Recent contract wins calm fears. Our fair value estimate equates to a little changed 2022 EV/EBITDA multiple of 6.9, the supporting growth assumptions of which demand AUD 3.5 billion in new contracts per quarter just to stand still in a revenue sense. The late 2018 flurry of new announcements bring the year’s average to AUD 3.4 billion per quarter, though announced contracts tend to represent only approximately two thirds of the actual total. Cimic is broadly on track.

Cimic shares are down 15% from September AUD 51.60 highs, but remain overvalued. We estimate the AUD 44 share price has the market anticipating a too-high 9% five-year EBITDA CAGR to AUD 2.3 billion by 2022. This when we are apparently just a year away from an anticipated annual approximately AUD 16 billion peak in major transport infrastructure spending in Australia, from a low of around AUD 6.0 billion in 2016 and an estimated AUD 13 billion in 2018. We still see little reason to become aggressively more bullish in our more tempered outlook which forecasts a plateau from peak spending rates.
Our 2018, EPS forecast is unchanged at AUD 2.35, and the full impact of our revenue growth assumption changes won't be felt until 2020 where we project a 5% EPS increase to AUD 2.86. Our 2019 EPS forecast increases only marginally to AUD 2.59.