CIMIC Versus Downer - Neither Is Cheap but Downer Currently Represents Better Value

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

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Morningstar, Inc.

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Equity Bottom-Up

We retain our AUD 24 per share fair value estimate for no-moat Cimic following full-year results. The firm reported an 11.5% increase in 2016 net profit after tax to a top-of-guidance AUD 580 million, in line with our expectations. While the bottom line improved, the primary drivers were a 40% decline in depreciation and amortisation to AUD 337 million, or 3% of revenue versus 4% in 2015, and a reduced 25% tax rate (correcting for overpayment in prior years), which saved a further AUD 38 million. On this basis, we believe the quality of the improvement was poor, as EBITDA margin declined marginally to 10.1% from 10.4% and net operating cash flow fell 22% to AUD 1.1 billion, in line with our expectations. Moreover, revenue fell 18% to AUD 10.9 billion, including the one-month AUD 204 million contribution from the UGL acquisition.We retain our no-moat rating for Cimic. Excess returns until 2014 largely stemmed from the China-driven commodities boom. The future is likely much less favourable, and we expect Cimic’s returns to be only modestly above its WACC. At AUD 39, Cimic shares trade at a substantial premium to our fair value estimate. We think the market is overly optimistic on the outlook for a recovery from mining, and on strong public infrastructure activity.Analyst: Mark Taylor

We retain our AUD 24 per share fair value estimate for no-moat Cimic following full-year results. The firm reported an 11.5% increase in 2016 net profit after tax to a top-of-guidance AUD 580 million, in line with our expectations. While the bottom line improved, the primary drivers were a 40% decline in depreciation and amortisation to AUD 337 million, or 3% of revenue versus 4% in 2015, and a reduced 25% tax rate (correcting for overpayment in prior years), which saved a further AUD 38 million. On this basis, we believe the quality of the improvement was poor, as EBITDA margin declined marginally to 10.1% from 10.4% and net operating cash flow fell 22% to AUD 1.1 billion, in line with our expectations. Moreover, revenue fell 18% to AUD 10.9 billion, including the one-month AUD 204 million contribution from the UGL acquisition.We retain our no-moat rating for Cimic. Excess returns until 2014 largely stemmed from the China-driven commodities boom. The future is likely much less favourable, and we expect Cimic’s returns to be only modestly above its WACC. At AUD 39, Cimic shares trade at a substantial premium to our fair value estimate. We think the market is overly optimistic on the outlook for a recovery from mining, and on strong public infrastructure activity.Analyst: Mark Taylor

Cimic Profit Hits High End of 2016 Guidance, but Shares Overvalued

CIMIC Group Ltd

Cimic Profit Hits High End of 2016 Guidance, but Shares Overvalued