德银-澳大利亚-基础设施行业-2018年12月结果与行业展望-2019.2.1-36页_1mb

Australasia E&C Sector Summary

Core Content

This report provides an analysis of the Engineering & Contractors (E&C) sector in Australasia, with a focus on key companies including CIMIC Group Ltd (CIM), Downer EDI (DOW), Monadelphous Group Ltd (MND), WorleyParsons (WOR), and ALS Ltd (ALQ). The outlook for the sector is positive due to a high backlog of infrastructure projects, recovery in minerals exploration, and expected increases in O&G capital expenditures (capex). Valuations are considered reasonable, with most stocks trading at or below their historical ranges.

Main Recommendations

• Buy: DOW and WOR
• Hold: ALQ and CIM
• Sell: MND

Key Points

Sector Outlook

• The E&C sector is experiencing a positive outlook across all end markets.
• High backlog of infrastructure work and recovery in O&G and mining capex are driving the optimism.
• Expected increases in O&G capex are anticipated to support the sector.

Reporting Season Expectations

• The Dec 18 reporting season is expected to show strong performance.
• CIM is anticipated to positively surprise with strong WIH growth and a FY18 guidance beat.

Valuation & Target Prices

• Target prices for the stocks are as follows:

  • ALQ: $7.05
  • CIM: $44.60
  • DOW: $8.78
  • MND: $12.10
  • WOR: $20.65

• Valuations are based on a combination of sum-of-the-parts multiple, P/E, and DCF methods.

• Key sector risks include a slowdown in key markets and project-specific issues.

Company Analysis

DOW (Buy)

• Performing well across core divisions and Spotless business.
• Spotless' Royal Adelaide Hospital contract has been underperforming, but management is expected to improve earnings.
• Forecasted FY18 NPAT of $774m and 8% EPS CAGR for FY18-FY20.
• Strong management team, conservative balance sheet, and large TSR justify the Buy rating.

WOR (Buy)

• Expected to benefit from global energy and minerals capex recovery.
• Reduced overheads and increased activity should lead to margin expansion.
• Forecasted 26% EPS CAGR over the next 4 years.
• Strong earnings outlook and valuation multiple expansion relative to peers and ASX Ind (ex banks) support the Buy rating.

CIM (Hold)

• Benefits from infrastructure backlog and recovering resources capex.
• Earnings growth constrained by labor force.
• FY19E P/E of 18x, broadly in line with historical P/E rel.
• Minimal TSR implies a Hold rating.

ALQ (Hold)

• Benefiting from recovery in its Commodities division.
• Life Sciences division underperforming but exposed to structural growth.
• Forecasted 9% EPS CAGR over the next 3 years.
• Upgraded to Hold as it is now in line with target price and trading at the lower end of historical P/E rel.

MND (Sell)

• Positioned to benefit from iron ore investment in Australia.
• However, the stock is considered expensive with a FY19E P/E of 24x and negative TSR.

Key Focus Areas

• FY18 Guidance: Management guided NPAT to be $720-$780m (3% to 11% growth), with forecasts at $774m.
• Construction Revenues: The largest segment, expected to drive performance.
• WIH (Work in Hand): Forecasted to increase sequentially to $38.0bn at Dec 18.
• Tenders: CIM's tender pipeline is a key focus, with $35bn in tenders for 2018 and $375bn for 2019 and beyond.
• Cash Conversion: Expected to be weak in 1H19 due to the Royal Adelaide Hospital contract drag.
• Earnings Skew: WOR and MND are expected to have greater earnings skew in 2H19 due to project timing.

Summary Table

Valuation & Risks

• Valuations are derived from a mix of sum-of-the-parts, P/E, and DCF methods.
• Key risks include slowdowns in key markets and project-specific challenges.

Sector Performance Overview

• Australian Infrastructure Construction: High backlog and rising spending in roads and power.
• Global O&G Capex: Early recovery phase, with consensus forecasts showing 5% growth in 2018, 4% in 2019, and 3% in 2020.
• Mining Capex: Positive outlook with 5% growth in 2018 and 2% in 2019.
• Global Minerals Drilling: Recovery since 2017, but growth rates are expected to slow due to larger base numbers.

Earnings Forecast Summary

Summary of Changes

• Updated FX assumptions and market multiples for all companies.
• Adjusted forecasts for margins and revenue based on new data.
• Target prices and ratings have been revised for CIM, DOW, MND, and WOR.

This summary encapsulates the key insights and analysis from the report, highlighting the positive sector outlook, individual company performance, and updated valuation and guidance.