The CIMIC Group Ltd (ASX: CIM) share price is down more than 35% from highs of over $50 in July. The construction giant has won a number of recent tenders, but its share price has been under a cloud over its use of reverse factoring to manage debts.
How has CIMIC performed this year?
CIMIC Group companies have won tenders for the upgrade of the Sunbury railway line, stage 2 of the Monash freeway upgrade, and the provision of earthworks for Western Sydney Airport since the start of September.
On Friday, a CIMIC company was awarded the contract to upgrade Melbourne's M80 Ring Road, which is estimated to bring in revenues of $331 million. Construction is due to start in early 2020 and be completed by early 2023. Shares in the industrials company lifted immediately on the news, rising to $33.03 at 12.30pm from $32.81 at midday on Friday following the announcement.
Shares in CIMIC fell nearly 20% on 18 July alone this year when the group revealed weakening construction profits and an artificial $2 billion boost to cash flows through the sale of receivables. The use of supply chain finance, or reverse factoring, by the group has also raised question marks, as the practice allows companies to log invoices owed as 'trade and other payables' on balance sheets rather than debt.
At the end of September, CIMIC reported a factoring balance of $1.97 billion, a similar level to June 2019 and December 2019. The group reported net profits after tax of $573 million to September 2019, up 2% on the prior corresponding period. Earnings before interest, tax, depreciation and amortisation (EBITDA) were up 9% to $538.9 million over the same period.
CIMIC booked revenues of $3,770 million in 3Q19, up marginally from $3,757 million in the prior corresponding period. Earnings per share were 63.7 cents, up from 61.7 cents.
The company undertook a share buyback in the third quarter of 2019, returning $294 million to shareholders, and had undrawn debt facilities of $2.7 billion at the end of September. In August, Moody's confirmed CIMIC's Baa2 credit rating, while S&P confirmed its BBB rating in June, both with a stable outlook.
CIMIC's outlook for 2020 and beyond
CIMIC has confirmed a $20 billion pipeline of work for the remainder of 2019, with $475 billion for 2020 and beyond. As at 30 September, $13.1 billion of new work had been awarded, up 11% year on year.
CIMIC reports a positive outlook as the mining market continues to strengthen and opportunities in construction and services are boosted by the public-private partnership pipeline.
Foolish takeaway
The award of the M80 contract is the latest tender win for CIMIC and has had a positive impact on the beaten down CIMIC share price, with CIMIC shares up another 1.49% in today's trade (at time of writing).
The group's continued use of reverse factoring, however, could leave some investors with concerns over the management of cash flows.
