After agreeing to sell 50% of its stake in the world’s largest mining services provider, Theiss, Cimic Group Ltd (ASX: CIM) has been warned it may see its credit rating downgraded. As is common in large merger and acquisition (M&A) transactions, Standard & Poor’s (S&P) is analysing the impact of the transaction and has placed Cimic’s credit rating on ‘CreditWatch negative’. This means it may lower.
S&P believes the disposal could reduce the business scale and diversity of the Cimic Group parent shareholder, Actividades de Construccion y Servicios SA (ACS). In addition, the ratings agency believes it may add complexity to the group structure and governance.
Rationale of the Cimic Group decision
Thiess delivers open cut and underground mining services in Australia, Asia and Africa. The company delivered an earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of 34%. This is is well above the group’s adjusted EBITDA margin of 8.3%. Hence, S&P have the view that Theiss’ mining activities have supported the group’s business diversification and profitability margin, and they complement Cimic’s civil engineering and construction business.
ACS group is using most of its available rating headroom in coping with the effects of the pandemic. S&P anticipates a drop in the ratio of funds from operations (FFO) to debt. It sees this metric declining to 28%-31% from 32.3% in 2019, and then recovering to above 30% in 2021. To maintain the ‘BBB’ credit rating, S&P expects to see this at around 30% to 40%.
The ratings agency is also questioning Cimic Group’s operational and strategic direction. This includes understanding the future role of Thiess in Cimic’s future operations and growth strategy. Moreover, it expressed concern over the operating constraints inherent within a joint-venture structure. Accordingly, S&P expects the company’s credit metrics will weaken, regardless of how it applies the proceeds from the sale.
Cimic saw its share price rise by almost 5% on the day it announced the 50% sale of Theiss. However, signs that accounts may not be reliable surfaced yesterday. The company was forced to reveal that it will not get the $1.1 billion of revenue it booked from the Gorgon project. During FY20, the company also had to write off $1.8 billion after being unable to recover debts owed for projects built during the Dubai property bubble.
The Cimic Group share price remains down by 33% in year-to-date trading. However, it has a trailing 12 month dividend yield of 7.14%.
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of June 30th
Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
- Afterpay (ASX:APT) share price under heavy fire from industry giants – November 30, 2020 9:22am
- IOOF (ASX:IFL) accused of butchering its share price – November 25, 2020 1:58pm
- The Objective Corp (ASX:OCL) share price is up ahead of AGM – November 25, 2020 10:58am