Majority Owner Hochtief to Bid AUD 22 in Tilt for Full Control of Cimic

Business Strategy & Outlook:

Cimic has developed the ability, reputation, and balance sheet strength to undertake numerous large-scale contract mining and construction projects simultaneously and in different countries. Few companies, apart from Cimic, in the domestic contract mining and construction market have the reputation, skill, knowledge, or capability to undertake challenging megascale mining and infrastructure projects. But excess returns of the recent past look to be a function of the China-driven commodities boom. Traditionally, Cimic’s annual operating revenue is split 60%-65% engineering and construction work, 20%-25% contract mining and 10%-15% services and property development work. Cimic’s contract mining business is highly capital-intensive but inherently lower risk than construction. Domestic and international mining contracts are normally schedule-of-rates style, with Cimic assuming risk on productivity and volumes.

Cimic lowers operating risk on contract mining work by mainly undertaking open-cut mining at coal and iron ore sites with quality deposits for large resource companies. However, competition can be fierce for new contract mining work and renewals. Despite relatively stable cash flows, the consequences of problems at a few large-scale construction projects can negatively affect the company’s overall operating cash flow and earnings. Large domestic infrastructure construction projects are predominantly fixed-price/fixed-time contracts, or alliance style with shared risk. Cimic’s project tenders incorporate a theoretical profit margin (pretax, overheads and depreciation) of at least 10%, providing a margin of safety. However, in fiscal 2011, Cimic incurred a net loss, primarily as a result of large losses on just two major infrastructure construction projects and at the company’s Middle East construction joint venture. Cimic exited the Middle East in early 2020, wearing AUD 700 million in post-tax financial guarantees. Cimic has numerous large-scale mining, infrastructure and service projects in Australia and internationally. Transparency on individual contracts/projects is low, feeding in to high uncertainty rating.

Financial Strengths:

Cimic is in strong financial health. The company finished December 2021 with AUD 502 million in net debt, leverage (ND/(ND+E)) of 32% and net debt to EBITDA a comfortable 0.6. The company sold a 50% stake in its Thiess mining contracting business to the U.K.’s Elliot in 2020, the transaction generating AUD 2.1 billion net cash proceeds. Cimic’s capital intensity is tempered with exposure to the equipment heavy mining contracting sector lessened. This should enhance the rate of cash conversion in future. In addition to the cash proceeds, the Thiess sell down reduces Cimic’s lease liability balance by approximately AUD 500 million. Net operating cash flow exceeded AUD 1.0 billion in each of the nine fiscal years preceding 2019, and free cash flow was positive in each of the last seven of those fiscal years. But net operating cash flow fell to AUD 927 million in 2019, not helped by one-off BIC Contracting exit costs in the Middle East and has been negative through to June 2021 due to COVID-19 and unwind in factoring. Traditionally, the company has a strong balance sheet and cash flow, which provides the necessary flexibility to tender for large infrastructure and mining contract projects. The cashflow to turn positive as the economy exits from COVID-19.

Bulls Say:

Cimic is the dominant infrastructure construction and mining services company in Australia and competes against only a small number of companies. Cimic holds AUD 36 billion of work in hand and a reasonably positive outlook.
Cimic has a solid long-term reputation for complex project design, execution and delivery.
Cimic’s new approach is to focus on risk management including tender accuracy, risk identification, satisfactory time allowance, adequate pricing risk and exact project delivery.

Company Description:

Cimic is Australia’s largest contractor, providing engineering, construction, contract mining services to the infrastructure, mining, energy, and property sectors. The business structure consists of construction, contract mining, public-private partnerships, and property, along with 45%-owned Habtoor Leighton. Cimic has exited its Middle East business. ACS/Hochtief owns 79% of Cimic.

(Source: Morningstar)

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