Construction and engineering giant Cimic Group Ltd (ASX: CIM) is bucking the market's downtrend with a better-than-expected half year result, which implies that its full year net profit could come in ahead of consensus.
Shares in Cimic, formerly known as Leighton Holdings, jumped 1.5% to $23.71 when the broader market has sunk 0.2% into the red in late morning trade.
The group's net profit of $257.2 million for the first six months to end June was comfortably above the $226.8 million that analysts polled on Bloomberg were expecting and the result represents a 7.5% increase over the same time last year.
The real surprise was the expansion in margin even though the industry is facing some challenging conditions with rising competition and a slowdown in mining construction from the collapse in commodity prices.
These challenges contributed to a 14.1% decline in revenues to $7.16 billion but management still managed to grow earnings by being more disciplined in bidding for projects, restructuring its operations and by transitioning its business from resource to infrastructure work.
This means Cimic's earnings before interest and tax (EBIT) margin has increased 150 basis points (or 1.5 percentage points) to 6.1% while net profit margin expanded 70 basis points to 3.6%.
If those margins can be sustained into the second half and if consensus revenue forecasts for 2015 of $16.55 billion are on the money, it will suggest that analysts will have to upgrade their net profit forecasts by around 18.5% on average to around $595 million.
These are big assumptions and that's a big upgrade. It's certainly not what management dares to suggest either. In fact, Cimic has only reaffirmed its full year net profit guidance of $450 million to $520 million, whereas consensus has penciled in a figure of around $502 million.
Getting a net profit number of $595 million might be too much to hope for, but I suspect there is a good chance that Cimic can deliver a number that's above the $520 million, although there isn't much visibility to earnings in this industry because it is difficult to predict project wins.
But at least Cimic's pipeline is looking fairly full as it has around $20 billion in new tenders that are expected to be awarded in the second half of 2015.
This is a solid result by Cimic, but I think even with the potential profit upgrade there doesn't look like there's compelling value as it will still be on a price-earnings multiple of around 14x. That's not expensive, but given the limited clarity on future earnings, I would be reluctant to pay more than 10x for the stock.
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