CIMIC Group reported an underlying profit of $800m, in line with guidance the company provided in late January, and so the result was broadly consistent with Ord Minnett’s forecast and consensus. Operating cash flow, however, saw a $7.3m increase in receivables factoring*, down 99.5% from CY18. As a result, CIMIC’s pre-factoring operating cash flow increased by more than $1bn in CY19 versus CY18, with about 50% generated in the seasonally strong fourth quarter. We maintain our Buy recommendation with a $40.00 target price.
CIMIC guided to a CY20 net profit of $810–850m, which management sees as being supported by a positive outlook across the group’s core markets. Mining continues to strengthen with opportunities in construction and services. Critically, while we have left our net profit forecast largely unchanged (lifted 1%), the mid-point of the guidance range is 3% above previous consensus forecasts.
The company provided an optimistic view on the pipeline of opportunities, noting at least $160bn of tenders are to be bid and/or awarded in CY20, with around $380bn of projects coming to the market in 2021 and beyond. CY19 work in hand of $37.5bn was up 2% on a year ago and at its highest level since CY13.
In a surprise announcement, CIMIC also announced the promotion of CPB Contractors managing director Juan Santamaria to the role of CEO, effective 5 February 2020. Outgoing CEO Michael Wright will remain with the group, but in a yet-to-be-announced “mining focused role to drive growth”. Before becoming group CEO, Wright was the former group executive for mining and mineral processing, responsible for the Thiess and Sedgman operations.
* CIMIC uses factoring agreements with banks and financial institutions to sell its receivables (debts owed to the seller but not yet paid). Use of such agreements has been criticised for having the effect of distorting the amount of operating cash flow within a company. Reverse factoring, or supply chain financing, is when a bank or finance company commits to pay a company’s invoices from its suppliers at an accelerated rate, e.g. in seven days rather than 30 days, in exchange for a discount on the invoice amount. The company then pays the bank for the invoices at a later date.