CIMIC Group Limited (ASX:CIM)

Michael Wright
CEO and MD
Market Cap (AUD): 10.47B
Sector: Industrials
Last Trade (AUD): 31.83 -0.46 (-1.46%)
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1. About

CIMIC Group Limited is a world-leading infrastructure, mining, services and public private partnerships group. The Company has businesses in construction, mining and mineral processing, operation and maintenance services, public private partnerships and engineering. Its mission is to generate sustainable shareholder returns by delivering innovative and competitive solutions for clients and safe, fulfilling careers for its people.

The Company has more than 50,000 people in 20 countries, the Company strives to be known for its principles of Integrity, Accountability, Innovation and Delivery, underpinned by Safety. CIMIC is a member of the S&P/ASX 100 index, the Dow Jones Sustainability Australia Index and FTSE4Good.

CIMIC also has a 45% investment in the HLG Contracting, a 59.11% investment in Devine and a 47% investment in Ventia.

2. Business model

 

The Group operates the following divisions:[1]

 

Divisions

Revenue ($M)

% of Total Revenue

% of Profit (before Interest & Tax)

Profit drivers[2]

Construction

$7,599.1

56.6%

65.0%

Construction revenue was $7.6 B for FY17, an increase of 3.9%, or $282.3 M, compared to FY16.Revenue have come from the large scale transport infrastructure projects

Mining & Mineral Processing

$3,164.4

23.6%

35.3%

Mining & mineral processing revenue was $3.2 B for FY17, an increase of 13.6%, or $378.2 M, compared to FY16. The increase in revenue reflects contract extensions and increased production levels, as resource markets gradually show improving trends, as well as the benefits of diversification across commodities and geographic markets

Services

$2,607.2

19.4%

17.2%

Services revenue was $2.6 B for FY17 which reflects the Group’s strengthened position in the operations and maintenance services market

HLG

N/A

N/A

    (5.0%)

Revenue from joint ventures and associates was $2.7 B for FY17, which mainly included contributions from HLG Contracting and Ventia

Corporate

$58.8

0.4%

(12.5%)

Corporate revenue was $58.8 M for FY17, a decrease of 89.2%, or $487.6 M, compared to FY16, mainly due to a reduction in commercial and residential property activity

Eliminations

N/A

N/A

N/A

N/A

3. Strategy

 

Key strategies include:[3]

 

Operating Model

CIMIC’s mission is to generate sustainable economic returns for shareholders by successfully delivering projects for its clients while providing safe, rewarding and fulfilling careers for its people. Key elements of its strategy are a disciplined approach to risk management and a focus on cash generation, complemented by a strategic approach to capital allocation, always underpinned by an uncompromising focus on safety.

CIMIC has activity-focused businesses in construction, mining, mineral processing, operations and maintenance services, PPPs and engineering. The size of these businesses creates economies of scale and strengthens their position in their respective markets. They are broadly diversified by market sector, activity, geography, type of client, contract type, volume and duration.

Its competitive position and size, combined with its strong balance sheet, puts CIMIC in a robust position to take advantage of growth opportunities, both organic and strategic, in its different markets. The Group’s diversity provides clients with integrated solutions from development to financing to engineering, construction, mining, operations and maintenance. The ability to offer a complementary suite of capabilities, throughout the life cycle of a client’s infrastructure or resources projects, differentiates CIMIC. The Group continuously seeks to expand and leverage these competencies to further develop in Australia, Asia-Pacific and other select geographies.

Crucial to the strategy is the generation of cash-backed profits, and the development of diversified income streams which helps to reduce volatility, and manage risk whilst generating sustainable returns. Shorter-term projects (e.g. construction) are balanced with medium-term projects (e.g. mining and large scale construction) and longer-term projects (e.g. PPPs, operations and maintenance services, and life-of-mine projects).

Underlying the Group’s activity-focused businesses are common systems and processes. This approach facilitates innovation and the sharing of knowledge, and provides a rigorous governance framework.

Its Principles of Integrity, Accountability, Innovation and Delivery, underpinned by Safety, guide all of the Group’s activities.

 

Acquisitions, Divestments and Investment

CIMIC’s strong balance sheet enables the Group to continue to evaluate acquisition or investment options that complement its capabilities and strategy as opportunities arise.

On 6 July 2017, CIMIC’s wholly owned subsidiary CIMIC Group Investments Pty Limited, sold its 23.64% shareholding in Macmahon on the ASX for a price of $0.165 per share, totalling $46.9 million.

 

Its diversity and inclusion strategic objectives are to:

  • Promote and improve female participation in its Group and achieve gender equity, including pay equity
    Increase indigenous employment and use of indigenous suppliers in its supply chain
  • Invest in local employment to ensure the future workforce is reflective of the country in which the Company operate
  • Cultivate an inclusive workplace of fairness and equity which fosters the unique skills and talent of Its people.

 

Outlook and Future Plans

The Company is committed to its people returning home safely at the end of a day’s work. In 2018, the Company plan to:

  • Maintain a consistent and unwavering focus on critical risk management and the application of critical risk controls
  • Focus on reducing the occurrence of C1 and PC1 incidents through:
  1. ensuring each past incident is effectively investigated
  2. putting in place hard controls where possible to ensure that similar incidents do not occur across the Group
  3. reviewing the controls put in place in response to C1 and PC1 incidents to measure their effectiveness
  • Continue to identify and manage the risk of occupational illnesses
  • Upgrade its Synergy Health & Safety Database and implement across all major operating companies
  • Develop and improve on evidence-based lead indicators
  • Consolidate and simplify its safety systems across the CIMIC Group

4. Markets

 

The Group operates in markets including:[4]

 

Industry (Australia)

Industry Revenue (2017)

Growth Rate

Construction

$356 billion

0.4% (annual 13-18)

Commercial and Industrial Building Construction

$36 billion

2.9% (annual 13-18)

Heavy Industry and Other Non-Building Construction

$38 billion

(5.9%) (annual 12-17)

5. Competition

 

Major competitors include:[5]

 

  • Opus Group Ltd (ASX:OPG)
  • Downer EDI Limited (ASX:DOW)
  • Brookfield Australia Investments Limited

6. History

 

1949[6]

The Company was formed in Australia in 1949 by Englishman, Stanley Leighton

 

1962

Leighton Contractors had been formed and floated as a public company and was listed on the Melbourne Stock Exchange

 

1960 – 1970

The late 1960s and early 70s were a period of growth for Leighton. It was a time for diversification, both in an operational and geographical sense

 

1971

Leighton Contractors changed its name to Leighton Holdings and was listed on the Sydney and Perth Stock Exchanges as well as Melbourne. Sydney-based Leighton Contractors became the main operating subsidiary

 

1975

A strategic moved into Asia in the early 70s culminated in the formation of Leighton Asia in 1975

 

1980

During the 1980s the Group expanded its portfolio of work and affirmed its standing as one of the leading companies in its field

 

1983

HOCHTIEF became the Group’s major shareholder, bringing Thiess into the Leighton Group

 

1984

The timing coincided with a sharp decline in engineering work available, and despite record turnovers, profit dropped in 1984 and in 1985

 

1986

Financial problems with Thiess, Green and the Burdekin Dam project in Queensland produced a loss of $12 million

 

1987

By August of 1987 the Group had returned to profitability, thanks to strong construction activity in Australia and a strategic plan to get rid of underperforming assets.

 

1990 – 1993

Growth and expansion continued throughout the 1990s and the decade included the end of the Group’s involvement in the US with the sale of Green Holdings in 1993

 

1996

The 1996 purchase of Visionstream enabled the Group to become a major player in Australia’s telecommunications market

 

2000  

The February 2000 purchase of 70 per cent of John Holland added to the Group’s core strength and allowed it to tap into new markets and regions

 

2003  

John Holland added to its contracting capability by acquiring selected contracts and resources of Transfield Construction and the transfer of its employees

 

2004  

The Group increased its stake in John Holland to 99% (and in October 2007 went to 100% ownership)

Offices were opened in India and the Middle East

 

2006

The Group continued to diversify and in February 2006 acquired the Australian and New Zealand contract mining assets of Henry Walker Eltin Group Limited (HWE)

 

2007  

The Group took a major step in 2007 with the acquisition of a 45% stake in the United Arab Emirates (UAE) and Qatar-based Al Habtoor Engineering, one of the largest contractors in the Middle East

 

2007 – 2011

In 2007, Leighton Asia opened its first office in Mongolia and by 2011 the Group had ventured into Southern Africa

 

2014   

Leighton Holdings’ major shareholder, HOCHTIEF AG, announced and closed its partial offer to acquire three out of eight shares in Leighton for $22.50 per share. HOCHTIEF’s shareholding in Leighton increased to 69.62% as a result of the offer

Leighton announced a Strategic Review of its operations, aimed at strengthening the balance sheet, streamlining the operating model and improving project delivery

Leighton announced the sale of John Holland to CCCC International Holding Limited for an enterprise valuation of approximately A$1.15 billion and announced the establishment a 50:50 investment partnership with funds managed by affiliates of Apollo Global Management (NYSE:APO) for the merged services business from Leighton Contractors and Thiess

 

2015  

Leighton articulated the principles which underpin its operations. These Principles provide a shared language and identity which guide its actions

 

2015  

Leighton Holdings Limited (ASX:LEI) changed its name to CIMIC Group Limited (ASX:CIM). CIMIC stands for Construction, Infrastructure, Mining and Concessions which better reflects who the Company is and what the Company does.

 

2016  

Leighton Contractors changed its name to CPB Contractors. The new name followed the merging in 2015 of the construction businesses of Thiess and Leighton Contractors.

CIMIC Group completed its off-market takeover of Sedgman Limited

CIMIC commenced acquisition of UGL Limited

 

2017  

CIMIC’s CPB contractors wins $312m metro tunnel rail works

CIMIC’s sedgman wins $100m in coal contracts in queensland

 

2018  

CIMIC’s CPB contractors wins $84m sydney recreation centre

7. Team

 

Board of Directors[7]

 

Marcelino Fernández Verdes – Executive Chairman

Michael Wright – Chief Executive Officer and Managing Director

Russell Langtry Chenu – Independent Non-Executive Director

José Luis del Valle Pérez – Non-Executive Director

Trevor Gerber – Independent Non-Executive Director

Pedro López Jiménez – Non-Executive Director[8]

David Paul Robinson – Non-Executive Director

Peter-Wilhelm Sassenfeld – Non-executive Director[9]

Kathryn (Kate) Spargo – Non-Executive Director

Ángel Muriel – Alternate Director[10]

Adolfo Valderas – Alternate Director[11]

 

Management Team

 

M Fernández Verdes – Executive Chairman

Michael Wright – Chief Executive Officer and Managing Director

S Camphausen – Chief Financial Officer

R Garrido – CIMIC Group Chief Safety, Strategy and Governance Officer

G Sassine – Executive General Manager, Investment and Group Property

J Gough – Executive General Manager, Internal Audit

L S Griffiths – Company Secretary

L Interligi – Chief Human Resources and Corporate Services Officer

J M Grogan – Executive General Manager, Sustainability

F Tyndall – General Manager, Communications

Lyn Nikolopoulos – CIMIC Group, Company Secretary[12]

Ignacio Segura – Deputy Chief Executive Officer and Chief Operating Officer[13]


read more

8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2016/2017 (ended 31 December):[14]

 

Divisions

Revenue ($M)

% Change

Profit (before Interest & Tax) ($M)

% Change

Construction

$7,599.1

3.9%

$623.7

4.7%

Mining & Mineral Processing

$3,164.4

13.6%

$338.8

22.9%

Services

$2,607.2

1176.8%

$164.8

1816.3%

HLG

N/A

N/A

($48.0)

(263.3%)

Corporate

$58.8

(89.2%)

($120.1)

28.8%

Eliminations

N/A

N/A

N/A

N/A

Total

$13,429.5

23.7%

$959.2

29.6%

9. Risk

 

Major risks include:[15]

 

Given the diversity of the Group’s operations and the breadth of its geographies and markets, a wide range of risk factors have the potential to affect the achievement of business objectives. Key risks, including those arising due to externalities such as the economic, natural and social operating environments, are set out in the following table, together with the Group’s approach to managing those risks.

 

The Group’s operations require planning, training and supervision to manage workplace health and safety hazards

A workplace health and safety incident or event may put its people and the community at risk.

 

The Group often works within, or adjacent to, sensitive environments

An environmental incident or unplanned event may occur that adversely impacts the environment or the communities in which the Company work.

 

External factors may affect the Group’s markets and growth plans

  • Changes in economic, political or societal trends, or unforeseen external events and actions, may affect business development and project delivery
  • Reduction in demand for global commodities and/or price may cause resource clients to curtail or cease capital investment programmes, or adjust operations, thereby impacting existing and future contracts.

 

The Group’s reputation is critical to securing future work and attracting and retaining quality personnel, subcontractors and suppliers

Issues impacting brand and reputation may affect the Group’s ability to secure future work opportunities, investment, suppliers or joint venture partners.

 

The Group targets work that meets a defined risk appetite and appropriately balances risk and reward

Work procurement challenges may impact its ability to secure high-quality projects and contracts.

 

Work delivery is subject to various inherent uncertainties

Work delivery challenges may manifest in actual costs increasing from its earlier estimates.

 

Credit risk

Credit risk represents the risk that a counterparty will not complete its obligations under a financial instrument resulting in a financial loss to the Group. The Group has a credit policy in place and exposure to credit risk is monitored on an ongoing basis. The Group minimises concentrations of credit risk by undertaking transactions with a large number of customers in various countries. Derivative and deposit counterparties are limited to investment grade financial institutions. At the reporting date, other than the trade receivables relating to the Gorgon LNG Jetty and Marine Structures Project, and the loan receivables from HLG Contracting (refer to Note 8: Trade and other receivables), there were no other significant concentrations of credit risk. The Group’s maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the statement of financial position. The Group’s maximum exposure to credit risk for receivables at the reporting date by geographic region was: Australia Pacific $1,262.4 million (31 December 2016: $1,145.6 million) and Asia, Middle East, Americas & Africa $3,045.3 million (31 December 2016: $3,299.8 million). The ageing of the Group’s receivables at the reporting date was: not past due: $314.0 million (31 December 2016: $564.1 million); past due: $264.9 million (31 December 2016: $353.5 million). Past due is defined under AASB 7 Financial Instruments: Disclosures to mean any amount outstanding for one or more days after the contractual due date. Past due receivables aged greater than 90 days: 6% (31 December 2016: 8%).

 

Liquidity risk

Liquidity risk is the risk of having insufficient funds to settle financial liabilities when they fall due. This includes having insufficient levels of committed credit facilities. The Group’s objective is to maintain efficient use of cash and debt facilities in order to balance the cost of borrowing and ensuring sufficient availability of credit facilities, to meet forecast capital requirements. The Group adopts a prudent approach to cash management which ensures sufficient levels of cash and committed credit facilities are maintained to meet working capital requirements. Liquidity is reviewed continually by the Group’s treasury departments through daily cash monitoring, review of available credit facilities and forecasting and matching of cash flows. At 31 December 2017 the Group had undrawn bank facilities of $2,531.0 million (31 December 2016: $1,686.4 million), and undrawn guarantee facilities of $875.0 million (31 December 2016: $546.3 million).

 

Equity price risk

Equity price risk is the risk that the fair value of either a listed or unlisted equity investment, derivative equity instrument, or a portfolio of such financial instruments decreases in the future. The Group invests in equity investments through its participation in major PPP infrastructure projects. Investments may also be made as part of its strategic plans to form alliances or to invest in specialised but complementary businesses to access specialised skills, markets, or additional capacity. Equity investments are not made for trading or speculative purposes.

 

Foreign currency risk

Foreign currency risk is the risk that the value of a financial commitment, a recognised asset or liability will fluctuate due to changes in foreign currency rates. The Group’s foreign currency risk arises primarily from net investments in foreign operations. The Group uses non-derivative financial instruments, such as borrowings in the foreign currencies, to hedge its investments in foreign operations. Foreign currency gains and losses arising from translation of net investments in foreign operations are recognised in the foreign currency translation reserve until realised. Shareholders of the Group are exposed to foreign currency risk on project receipts and expenditure on plant and equipment denominated in currencies other than their functional currency. Where this foreign currency risk is considered to be significant, shareholders of the Group enter into forward exchange contracts to hedge their foreign currency risk. These hedges are classified as cash flow hedges and measured at fair value.

 

Interest rate risk

Interest rate risk is the risk that the value of a financial instrument or cash flow associated with the instrument will fluctuate due to changes in the market interest rates. The Group uses derivative financial instruments to assist in managing its interest rate exposure. Speculative trading is not undertaken. The Group’s interest rate risk arises from the interest receivable on ’Cash and cash equivalents’ and interest payable on ‘Interest bearing loans’. At the reporting date it is estimated that an increase of one percentage point in floating interest rates would have increased the Group’s profit after tax and retained earnings by $14.9 million (31 December 2016: increased by $8.3 million). A one percentage point decrease in interest rates would have an equal and opposite effect.

References

  1. ^ Annual Report 2017, P. 211-212
    https://www.listcorp.com/asx/cim/cimic-group-limited/news/annual-report-to-shareholders-1797161.html
  2. ^ Annual Report 2017, P. 43-44
    https://www.listcorp.com/asx/cim/cimic-group-limited/news/annual-report-to-shareholders-1797161.html
  3. ^ Annual Report 2017, P. 42, 97
    https://www.listcorp.com/asx/cim/cimic-group-limited/news/annual-report-to-shareholders-1797161.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=306
    http://www.ibisworld.com.au/industry/default.aspx?indid=1827
    http://www.ibisworld.com.au/industry/default.aspx?indid=314
  5. ^ http://www.hoovers.com/company-information/cs/company-profile.CIMIC_Group_Limited.954661e89fed41de.html
  6. ^ http://www.cimic.com.au/our-business/our-history https://www.listcorp.com/asx/cim/cimic-group-limited/news/cimics-cpb-contractors-wins-312m-metro-tunnel-rail-works-1761545.html
    https://www.listcorp.com/asx/cim/cimic-group-limited/news/cimics-sedgman-wins-100m-in-coal-contracts-in-queensland-1758073.html
    https://www.listcorp.com/asx/cim/cimic-group-limited/news/cimics-cpb-contractors-wins-84m-sydney-recreation-centre-1784342.html
  7. ^ http://www.cimic.com.au/our-approach/directors-resumes
    http://www.cimic.com.au/our-business/cimic-group-limited-management-resumes
  8. ^ https://www.listcorp.com/asx/cim/cimic-group-limited/news/appointment-of-alternate-directors-1723067.html
  9. ^ https://www.listcorp.com/asx/cim/cimic-group-limited/news/appointment-of-alternate-directors-1723067.html
  10. ^ https://www.listcorp.com/asx/cim/cimic-group-limited/news/appointment-of-alternate-directors-1723067.html
  11. ^ https://www.listcorp.com/asx/cim/cimic-group-limited/news/appointment-of-alternate-directors-1723067.html
  12. ^ https://www.listcorp.com/asx/cim/cimic-group-limited/news/appointment-of-additional-company-secretary-1613634.html
  13. ^ https://www.listcorp.com/asx/cim/cimic-group-limited/news/appointment-of-chief-executive-officer-and-deputy-ceo-coo-1723058.html
  14. ^ Annual Report 2017, P. 211-212
    https://www.listcorp.com/asx/cim/cimic-group-limited/news/annual-report-to-shareholders-1797161.html
  15. ^ Annual Report 2017, P. 52, 217-221
    https://www.listcorp.com/asx/cim/cimic-group-limited/news/annual-report-to-shareholders-1797161.html