Cimic shares routed as Morgan slashes price target

On Morgan Stanley’s dramatically revised metrics, the engineering giant would be worth less than $5 billion.

Engineering giant Cimic has seen its shares routed after Morgan Stanley delivered a reduced price target that tips a stunning 65 per cent downside to the group’s valuation.

The investment bank’s analysts have long been bearish on Cimic, but its latest report on the group formerly known as Leighton not only reduced the already depressed target price but also warned on a “disconnect” between profitability and cash flow.

Cimic shares plummeted as much as 17 per cent in early afternoon trade before closing 16.5 per cent lower, at $30.25.

The sharp slide is its worst since April 2011.

The horror session does not bring it close to Morgan Stanley’s reduced target of $12.40, however.

On Morgan Stanley’s metrics the group, valued around $12 billion before today’s share price fall, would in fact be worth less than $5bn.

The investment bank’s analysts, led by Nicholas Robison, said the first quarter net profit lift of 5 per cent to $130 million potentially hid “deeper underlying issues”.

“Our cash reconciliation suggests that this [profit] may not have been backed by cash, continuing a disconnect since at least 2014,” Mr Robison wrote.

“Working capital seasonality is likely a major factor and could prove benign, although proportionally the movement is larger than in prior years.

“We thus cannot discount the potential that the around $300m cash gap we reconcile reflects deeper underlying issues, with scope that reported profits could be greater than 30 per cent above underlying cash flow.”

The questioning of Cimic’s numbers extended to the firm’s margins, with its best quarterly margin in a decade coming in a competitive market that sees many of its peers struggling.

“[There is] an inexplicable disconnect between Cimic’s margins and those of the broader domestic peer group – something apparent since 2014,” the report read.

“No other contractor is demonstrating such negative operating leverage at a time when Australian E&C capex is going through its largest downturn in more than 30 years.”

Mr Robison said Morgan Stanley had attempted “at considerable length” to reconcile Cimic’s numbers on two occasions, but the firm is still perplexed by the detail.

“Despite our efforts we continue to struggle logically and rationally to reconcile Cimic’s reported profits with cash flows or at the very least confirm that the alternative potentially negative interpretations are less plausible than the positive stance provided by Cimic,” he said.

Cimic declined to comment on the report when contacted by The Australian.