CIMIC shares slump 20pc after first half result

Engineering giant CIMIC has had $2bn wiped from its value after a weaker-than-expected first-half result.

CIMIC chief executive Marcelino Fernandez Verdes.

Engineering and construction giant CIMIC has seen $2 billion wiped from its valuation after delivering a much weaker-than-expected first-half result last night.

As first revealed in The Australian, the headline profit increase of 3.1 per cent hid the importance of the integration of smaller rival Sedgman into its business.

The lift in its stake in Sedgman from 37 per cent to full control added $4 million in after-tax profit for the June quarter alone.

However, it was the $46.6m readjustment in the carrying value of its prior 37 per cent stake in Sedgman that really skewed the numbers, contributing 12.7 per cent to its pre-tax profit.

Without the integration of Sedgman the group’s headline profit likely would have slid almost 9 per cent, instead of rising 3.1 per cent.

The group (CIM) also undershot market estimates on revenue as it recorded a 30 per cent drop in sales, with the good news coming only from an increase in margins and positive talk on its pipeline of work.

Analysts have been brutal in their response, with Deutsche downgrading the stock’s rating to “sell” and Macquarie reducing its view from “neutral” to “underperform”.

“CIMIC’s H1 result missed most of our forecasts and we consider it a low quality result as reported earnings were boosted by a revaluation gain when CIMIC acquired the remaining Sedgman shares it did not already own,” Deutsche said.

Macquarie echoed similar sentiments in declaring quality was on the “weak side” and noting it fell short of its expectations.

Analysts at CLSA also questioned the strength of the report in retaining an “underperform” rating, while longtime CIMIC critic Morgan Stanley held its “underperform” rating.

The only major investment bank to release an optimistic outlook after the results was Goldman Sachs, which retained a “neutral” rating despite noting the numbers were “mixed”.

“CIMIC reported a mixed H1 result that delivered on profits, but not on cash flow,” the group said.

The analyst response helped drive a near 20 per cent decline in the group’s shares in Wednesday trade, its steepest daily fall since 2004.

The downward slide in its stock follows a similarly vigorous sell-off two weeks ago when Morgan Stanley warned it was struggling to reconcile the group’s accounts. The firm’s analysts said they were no closer to doing so after the latest half-year report.

“In our view risk remains skewed to the downside,” a note from Morgan Stanley read.

“In particular we highlight the disconnect between reported profit and cash flow which continued through H1. As such, we remain cautious, especially in light of CIMIC’s premium valuation.”

The group holds a price target of just $12.40, which is still less than half CIMIC’s trading price after today’s nosedive.

Macquarie’s price target was trimmed to $30.35, from $35.85, while Deutsche Bank revised its target to $22.95, from $26.31.

Goldman Sachs is the outlier on the bullish side with a target of $34.70.

At the closing bell, CIMIC shares traded down 19 per cent at $26.96.