Cimic Group Ltd (ASX: CIM) shares are sliding lower today after the company revealed a downgrade to its credit rating. At the time of writing, the Cimic share price has edged 0.33% lower to $18.88. However, for context, the S&P/ASX 200 Index is also having a pretty flat day and is currently down by 0.02%.
Let’s take a look at what the construction giant reported.
Cimic’s credit rating worsens
In a statement to the ASX this morning, Cimic revealed that ratings agency Standard & Poors (S&P) has revised down the company’s credit rating. Previously, its rating was BBB/A-2 and it is now BBB/A-3. The agency did, however, revise its outlook on Cimic from ‘CreditWatch negative’ to ‘stable outlook’.
In its assessment, S&P viewed Cimic’s $2.2 billion sale of mining services provider Thiess negatively. The agency stated the move reduced “the business scale and diversity of Cimic…” and thus exposed it to more risk.
The credit analysts also highlighted that Cimic performed below expectations during FY20, even after incorporating the effects of COVID-19. Factoring in the Thiess sale, and a higher debt-to-earnings ratio that’s expected to remain for at least the next two years, ultimately led S&P to downgrade Cimic’s creditworthiness.
In some positive news for investors, S&P highlighted Cimic’s strength in the construction industry and the fact this should ultimately keep it in good stead.
From the report:
Cimic’s favorable end-market exposure and work in hand should help mitigate the group’s exposure to the operating risks, uneven project tenders, and inherent cyclicality of the construction industry.
The group’s proven ability to deliver large-scale and technically complex projects–including tunnels and bridges–supports its ability to win new contracts. Cimic’s work in hand as of Dec. 31, 2020, was about A$30.1 billion (adjusted for Thiess at 50%) and provides revenue visibility for approximately the next two years. Having said that, the lower level of work awarded in the past 12 months will likely weigh on revenues in fiscal 2021.
Cimic is also is in a good cash position, according to S&P’s report. Over the next two years, S&P believes the group will earn 1.5x more revenue than expenses “even if EBITDA declines by 30%.”
It also noted Cimic has “large cash reserves and [S&P] expect positive operating cash flow…”
Cimic share price snapshot
The Cimic share price has been tumbling over the past week as the fallout from the Greensill liquidation continues.
Shares in the company were trading at $26.00 as recently as 30 days ago. Since then, the Cimic share price has collapsed by 27.4%.