CIMIC tanks on earnings miss, but is the move overdone?

James Gerrish

Market Matters

The market softened again today, however, overall it was another low volume session where a lack of buying interest rather than anything more sinister saw the index close in the red. Asian markets were weak, Japan the worst of the region down nearly 2%, while US Futures tracked lower during our time zone.

On the economic front today, employment data was in line with expectations (5.2% unemployment rate) on the headline number, however the composition of full time versus part time jobs was strong.

Economic Data

Energy stocks were the biggest drag today following crude’s decline overnight, while a number of company updates caused some big moves in stocks. Nickel miner Western Areas (WSA) released a strong quarterly update and rallied +5%, a buoyant nickel price also helped while CIMIC (CIM) was a casualty on the downside, dropping a substantial ~19%. Harry covers the stock below and thinks the selling is well and truly overdone, particularly given the reinstatement of the on-market buyback. Elsewhere, Alumina (AWC) was hit early, but recovered late following the quarterly report overnight from Alcoa, while Estia Healthcare (EHE) recovered +3.45% after dropping 5% yesterday on the announcement of a class action.

We covered Domino’s in the AM report today and the stock did close higher – up by 2.4% - and for now we’ll hold our short-term position.

Overall, the ASX 200 lost -24 points today or -0.36% to 6649. Dow Futures are trading down -89 points / -0.33%.

ASX 200 Chart

ASX 200 Chart


CIMIC Group (CIM) -18.98%; shares tumbled to two-year lows following a soft first-half result which the company presented after market yesterday. The profit line was marginally better than first half 2018 at $367m with the company needing a large second-half skew to meet the reiterated guidance of $790m-$840m. The miss was driven by the construction business, which accounts for nearly half of CIMIC’s earnings. Much of the 15% decline here was felt in its Asian market where the company is facing backlash from alleged defects in construction works in Hong Kong. The tumble was offset by a surge in the mining division, which saw profits rise more than 25% - a positive read through for our current holding in Ausdrill (ASL) which rallied by 3.12% to close just shy of our +$2 target.

CIMIC is used to seeing a marginal skew of around 45/55 to the second-half earnings, which would be enough to meet the lower end of guidance at the full-year result. There is also a clear path to achieving this as total work in hand rose 6% in the half. The Australian infrastructure market – where CIMIC is the biggest player – has a solid pipeline for the next few years. The sell-off today seems too aggressive given that it isn’t too far off the pace to meet guidance, and the company announcing it will recommence its on market buyback which should also be supportive. A weak result in a thinly traded stock on a low volume day = 19% decline. CIM is now back on the MM radar.

Cimic (CIM) Chart

LendLease Group (LLC) 4.75%; announced it has entered an agreement with Google to build out Silicon Valley – an estimated 15 million square feet of residential, retail, hospitality and other community uses in creating suburbs in the particularly underdeveloped area. Work is expected to start in 2021, and pending approval would result in around $US15bn spend over the next 10 to 15 years in the San Francisco Bay area. It will be 24 months before works begin and there's plenty of detail still to be fleshed out.

LendLease (LLC) Chart

Broker moves; While UBS does not provide their research to Bloomberg (which is where the below list comes from) we see today they upgraded their price target on Bingo to $2.70, up +35% on the prior target, largely on the back of positive earnings revisions following planned price hikes. We sold BIN recently and are now watching closely, their upcoming results remain the key.

  • CIMIC Downgraded to Underperform at Macquarie; PT A$43.80
  • CIMIC Downgraded to Underperform at Credit Suisse; PT A$35
  • OceanaGold Reinstated at Macquarie With Outperform; PT C$5
  • Syrah Downgraded to Underperform at Macquarie; PT A$0.90
  • CSL Downgraded to Neutral at Citi; PT A$239.60
  • Magellan Financial Cut to Underperform at Macquarie; PT A$45
  • G8 Education Downgraded to Neutral at Macquarie; PT A$2.80
  • OceanaGold GDRs Upgraded to Outperform at Macquarie; PT A$5
  • GrainCorp Downgraded to Hold at Morningstar
  • Cochlear Downgraded to Sell at Citi

Never miss an update

Market Matters publishes daily market reports and sends SMS alerts when we transact on our portfolio. To get our latest market views and hear when we take new positions, trial Market Matters for 14 days at no cost by clicking here.

1 topic

James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.