CIMIC share price volatile following Middle East exit

We look at the details behind CIMIC Group’s exit from the Middle East.

CIMIC Group (ASX: CIM) – a leader in mining, services and public private partnerships – yesterday saw its share price collapse.

The catalyst? The revelation that CIMIC would be exiting the Middle East region: specifically as it related to the company’s 45% interest in BIC Contracting (BICC).

The firm commented that it will instead focus its resources on opportunities across its core markets and geographies.

Yet the immediate impact of this exit is a significant one: with CIM set to ‘recognise a one-off post-tax impact of around $1.8 billion in its 2019 financial statements.’

'The aforementioned impact includes an expect cash outlay net of tax of around $700 million during 2020, as CIMIC's financial statements, representing all of CIMIC's exposure in relation to BICC,' the company further added.

The company has now initiated a ‘confidential M&A process' in relation to its BICC investment. These discussions remain ongoing.

CIMIC will not pay a final 2019 dividend as a result of this.

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CIMIC share price: the investor response

With the type of bearish zeal one would expect from such news: investors bid CIMIC’s share price some ~20% lower yesterday; with its stock closing out the session at $28.030 per share.

In saying that, CIMIC's stock did rebound modestly today, rising 4.709%, at the time of writing.

Ultimately, it’s been a difficult year for CIMIC shareholders, with the company’s stock currently sitting towards the bottom-end of its 52-week high and low bound. At its 52-week peak, CIMIC traded at $51.50 per share.

It now trades ~40% lower than that.

Broker thoughts

As a result of this Middle Eastern exit, Macquarie has lowered their share price target on CIMIC to $32.49 per share, from $35.00 per share. The investment bank is currently ‘neutral’ on CIM – with a number of cash conversion uncertainties still hanging over the firm, noted analysts.

Interestingly, Macquarie further wrote:

‘We noted previously that CIM continues to guarantee BICC (Middle East) debt facilities and these had gone up substantially to US$862m in 1H19, up from US$631m at 31 Dec 2018 and US$326m at 31 Dec 2017.’

UBS took a similar view to Macquarie today – noting that the market had been concerned about CIM’s BICC exposure for some time now.

‘We see some positive in CIMIC deciding to put the Middle East venture behind it, as in CIMIC's core market the outlook remains strong,’ UBS analysts however said.

Like Macquarie, in response to this exit, UBS has reduced their share price target on CIMIC CIM – now at $30.41 per share – down from $35.80 per share.

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