Moody's upgrades CIMIC Group from Baa3 to Baa2 | KOSEC

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Moody’s upgrades CIMIC Group from Baa3 to Baa2

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As of the 29th of June, Moody’s Investors Service (Moody’s) released a credit opinion update on CIMIC Group (ASX: CIM), rating the company with an investment-grade credit rating of Baa2. This grade is the 9th highest rating Moody’s offers and allows investors to gain an insight into the main data points in the business. These points include a stable credit profile, secure market positioning in Australian construction, services, mining, and a strong financial and liquid position. These factors consider the macroeconomic effects of the COVID-19 pandemic.

Moody’s look at CIM takes into consideration their position as the most substantial construction and mining contractors in Australia, which has allowed for a diversity of work across many sectors, geographies. However, due to this vast expanse, CIM is exposed to riskier large projects which are more likely to experience problems. An example of this is CIM’s involvement in the Middle East, wherein 2019; they had to exit a 45 per cent stake in BIC Contracting (BICC). There was an unrecoverable write-down cost of AUD1.8 million which wiped all exposure to BICC. This move affected 2019 results negatively, yet Moody’s considers the action to have long term positivity on the company, with BICC having constant losses between 2015 to 2017.

Another factor influencing perspectives is the performance of CIM major shareholder Hochtief and ACS. ACS owns 50.4 per cent of Hochtief, which owns around 77 per cent of CIM. The risk is both of these businesses have weaker financial positions comparatively and may disadvantage CIM if they raise dividends and draw from the company. CIM operations must sustain their debt maturities over the next 12-18 months, and material losses from riskier projects need to float above a 5 per cent drop to avoid any credit downgrades.

CIM has as of March 2020 had an 8.6 per cent increase in earnings before interest, taxes, depreciation, and amortization (EBITDA) year on year to around AUD2.2 billion. Mining operations supported this growth; with a 38 per cent growth in earnings before interest and taxes (EBIT) over 2019. Due to macroeconomic factors weakening thermal and coking coal markets, growth expectations are flatter over the next 12 to 18 month period. EBIT from construction declined by 19 per cent in 2019, where Hong Kong activities fell due to a new strategy that looks to projects with lessened risk. Looking to the future, CIM has an order book that totals AUD36 billion as of March 2020 which represents revenue for around two years, which Moody’s considers positive.

Gross cash and equivalent liquidity assets of AUD4.45 billion as of the end of March are going to cover the next 12 months of capital expenditure which is between AUD700 to AUD800 million, dividends distributions between AUD200 to AUD300 million, and debt maturities of around AUD200 million. Due to the debt to equity ratio, Moody’s has given it a Baa3 scorecard rating. However, because of the above factors, CIM market positioning has been bumped up to Baa2.

By Caroline Wong 

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Caroline Wong

Caroline Wong is a Research Analyst at KOSEC – Kodari Securities. She writes on markets and focuses on ASX Top 300 companies. Email Caroline at c.wong@kosec.com.au.

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