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CIMIC joins Chinese players on Best Ideas list

Lex Hall  |  02 Mar 2020Text size  Decrease  Increase  |  
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Australian construction giant CIMIC has built a place in Morningstar’s Global Equity Best Ideas list alongside China’s biggest travel agency Trip.com and casino titan Wynn Macau.

CIMIC is trading at a 32 per cent discount to Morningstar’s fair value estimate while Trip.com and Wynn Macau are both at a 40 per cent discount.

Trip.com has been added to the list in place of wide-moat Chinese internet giant Tencent Holdings, which has had a good run and is trading in line with Morningstar’s fair value estimate of HKD460.

Wynn Macau takes the place of MGM China Holdings, which has showed no signs of market share gain despite the launch of all villas at MGM Cotai that are aimed to target high-end premium mass customers.

Cimic’s fortunes built on strong balance sheet

Cimic (ASX: CIM) is Australia's largest contractor, providing engineering, construction, contract mining services to the infrastructure, mining, energy, and property sectors. It has several large-scale mining, infrastructure and service projects in Australia and internationally.

Cimic’s share price has fallen more than 50 per cent in the past year amid construction project issues, slowing demand for mining services, Middle Eastern business woes, corruption allegations, and boardroom battles.

However, its scale, long-term relationships, and balance sheet strength have always allowed it to maintain high levels of work, particularly large-scale infrastructure construction projects, says Morningstar analyst Mark Taylor.

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At the close on Monday, CIMIC was defying the coronavirus effect on local stocks, up about 1 per cent at $24 – a 32 per cent discount to Taylor’s fair value estimate of $35.

Traditionally, Cimic's annual operating revenue is split 60-65 per cent engineering and construction work, 20-25 per cent contract mining and 10-15 per cent services and property development work.

Cimic is in strong financial health, with no net debt and solid operating cash flow, Taylor says.

“Current work-in-hand sits at $37.5 billion, equivalent to just over two years’ revenue at our forecast 2020 revenue rate.”

Its enterprise value – a measure of market cap plus short- and long-term debt – sits favourably at 0.19, well down from 2017’s 0.44 peak and now also below the 10-year average to 2019 of 0.26, a more favourable entry level, Taylor says.

“Cimic ended fiscal 2019 with $827 million in net cash excluding capitalised operating leases as debt. Net operating cash flow exceeded $1 billion in each of the nine fiscal years preceding 2019, and free cash flow was positive in each of the last seven of those fiscal years.”

CIMIC price chart

Cimic's price to fair value. Source: Morningstar

Trip.com tipped to recover margins

Like many travel and tourism companies, Trip.com (TCOM), China’s largest online travel agency, is at the front line as the coronavirus/covid-19 pandemic persists. Since the first cases first emerged on New Year’s Eve, Trip.com’s share price has fallen by close to 18 per cent.

It is now trading at US$30.36 – a 40 per cent discount to the US$50 fair value estimate set by Morningstar analyst Chelsey Tam.   

As well as covid-19, Trip.com has also endured public relations scandals, macroeconomic fallout from the trade war, Hong Kong protests, and China's ban on individual travel to Taiwan.

But Tam says there are reasons to believe in a brighter future for Trip.com, which generates more than 80 per cent of sales by serving as a consolidator for hotel reservations and air ticketing transactions.

“We believe the epidemic will further delay its recovery. But we urge investors not to lose sight of its long-term growth potential,” says Tam.

“Trip.com is very dominant in outbound travel and the higher-end travel segment. Its market share in online accommodation reservation was 67.5 per cent in the second quarter of 2019. Online travel penetration in China is roughly 20 per cent currently versus over 50 per cent in the US and Europe.

Only 14 per cent of the 1.36 billion-strong Chinese population were estimated to have passports as of the end of 2019, versus 42 per cent in the US in 2017, Tam notes.

china streetscape

Only 14 per cent of the 1.36 billion-strong Chinese population were estimated to have passports as of the end of 2019

After the epidemic, Tam says Trip.com should be able to meet its operating margin guidance of 20 per cent for the full year.

“We think its faster-growing higher-margin international business will raise the overall margin. International products have higher margins as the price is on average two times higher than domestic businesses, and the take rate for international air tickets is also higher than domestic by two times.

“Increasing outbound travel from China, which has the largest population in the world, will give Trip.com scale and bargaining power in the global travel industry.”

Wynn Macau to turn the tables

The key strength of Wynn Macau (01128) is its share of high-rollers – the VIP and premium mass market. But weak macroeconomic factors have put a dent in the high-end segment, which has in turn driven away investors.

Wynn Macau has fallen by more than 57 per cent since its peak of HKD37.40. It is currently trading at HKD15.76 – a 40 per cent discount to Tam’s fair value estimate of HKD26.

However, the “grind mass” segment – smaller players who ask the least from the casinos and thus deliver the highest profit margins –has held up.

Tam forecasts the high-end segment to rebound.

“2019 was a year of renovation for the Wynn Macau property, which led to disruptions. The newly renovated Encore hotel tower, the new premium mass gaming area Lakeside casino, and some part of the mass gaming area have opened by the end of 2019, and we expect to see some market share gain for the Wynn Macau property.

“After the outbreak of coronavirus is normalised and the economy is back on track, we expect the high-end segments are the ones that will come back first and come back strongly. This will lead to an increase of Wynn Macau’s share price toward our fair value estimates.”

There are 12 Australian names in the Morningstar Global Best Ideas list.

For tips on buying international shares, see Prem Icon Morningstar Guide to International Investing 

VIDEO: Behind Morningstar's Best Ideas list



is senior editor for Morningstar Australia

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