Analysts slash CIMIC's ratings after weak result; shares plunge
Construction giant’s CIMIC Group’s weak result has caught analysts by surprise and sent investors heading for the exit, with the stock suffering a 15 per cent plunge on Thursday morning.
The ASX-listed company, formerly known as Leighton Holdings, announced late on Wednesday a half-year profit of $367 million and reaffirmed guidance for a full-year profit of between $790 million to $840 million.
The result was below analysts expectations, and the group’s operating cash flow of $300 million for the half was well below last year’s $636 million.
Investors rushed to dump the stock as it started trading again on Thursday morning, sending the group’s share price plunging 15 per cent within an hour of trading.
“We had flagged likely weaker construction and stronger mining results in our preview, but the extent of both of these surprised us,” analysts at investment bank Macquarie said.
About $2.1 billion of the group’s total $8.1 billion in revenue for the six months to June came from increased production from its Australian mining contracts and mineral projects overseas, delivering a 26 per cent jump in pre-tax profit to $236 million.
A larger chunk of income, $3.6 billion, was earned by the multi-billion-dollar construction projects the company runs in Australia, although that revenue dropped 7 per cent from the previous period due to a decline in Hong Kong’s construction market, CIMIC said.
“We also think there is an element of timing of Australian projects at play, with CIMIC completing [the] likes of WestConnex 1B and North West Metro but with new awards such as Cross River Rail in Queensland yet to start-up,” Macquarie said.
CIMIC's executives said during a call with analysts that the company’s mix of work was moving to more alliance-style contracts, which generate a more even cash flow, rather than fixed price contracts which have a large up-front cash flow.
The alliance-style contracts - where governments share the risk on big ticket, complex infrastructure projects - should lower the company’s future risk profile, they said.
UBS’ analysts said the result was a “little on the soft side.”
“We have reduced our 12-month price target [for the stock] to $46.00 (it was $50.00) on lower earnings and cash conversion estimates,” they said.
Macquarie’s analysts slashed their rating on the engineering and construction firm from neutral to underperform.
CIMIC’s results noted it had strong work in hand of $36.8 billion, equivalent to more than two years' worth of revenue, and was bidding for another $60 billion on offer this year, and $400 billion next year, including $130 billion in public private partnerships.
Over the first six months of this year it was awarded 8.3 billion in new work.