CIMIC set to exit Middle East

CIMIC shares slump 19pc after it announced $1.8bn writedown and dividend suspension, as it pulls out of the Middle East.

CIMIC is planning to pull out of the Middle East.

Australia’s biggest construction company, CIMIC, will take a $1.8 billion writedown and scrap its final dividend after pulling the pin on its troubled Middle East business following a downturn in the Gulf market.

CIMIC, formerly known as Leighton Holdings, said it plans to offload its non-controlling 45 per cent stake in the Dubai-based BIC Contracting joint venture, which had previously operated as Al Habtoor Leighton. A shortlist of bidders has been drawn up with suitors interested in buying all or part of the BICC business.

CIMIC shares sank on the news, falling 19.9 per cent by the close of trade to $28.03 on Thursday.

The Sydney-based engineering group has also started talks with lenders, creditors, clients and stakeholders following “an accelerated deterioration of local market conditions”.

“After thorough evaluation of all available options, CIMIC has decided to exit the region and focus its resources and capital allocation on growth opportunities in its main core markets and geographies: Australia, New Zealand and Asia Pacific,” CIMIC said in a statement.

The move was flagged by The Australian’s DataRoom in December.

A $1.8bn post-tax writedown will be included in its 2019 financial statements which includes a cash outlay of $700 million to settle financial guarantees of BICC liabilities with a final dividend for 2019 axed as a result.

The $700m cash impact equates to a $2.20 per share hit, Macquarie estimates.

“The decision to exit the region is expected to trigger these guarantees, which is what the incremental cash impact relates to (shareholder loan cash has already gone out but won’t return),” Macquarie said in a note to clients. “CIMIC notes that it has committed facilities and cash to meet all of its obligations.”

CIMIC expects 2019 net profit of around $800m, excluding the BICC impact, at the lower end of $790m to $840m guidance range issued in October. The company will deliver its results on February 4.

A dividend will likely resume in the first half of 2020 as earnings recover, Macquarie noted.

CIMIC is controlled by the Spanish-German shareholder Hochtief-ACS, which owns a 73 per cent stake in the business.

CIMIC first gained exposure to the Middle East in 2007 when Leighton Holdings merged its regional operations with Al-Habtoor Engineering group, taking a 45 per cent stake in the combined company for $870m in a bid to win new business in the lucrative Gulf market.

Leighton at the time moved its international headquarters to Dubai from Kuala Lumpur to cash in on the region’s booming construction market, which appeared to have dodged any major fallout from the global financial crisis.

Al Habtoor was established in Dubai in 1970 and made a name for itself in the Gulf’s burgeoning market after building the city’s distinctive sail-shaped Burj Al Arab hotel.

However, the joint venture has soured in recent years with the Al Habtoor group distancing itself from the subsidiary amid a broader downturn in the region’s construction markets.