The Cimic Group Ltd (ASX: CIM) share price rose 2% this morning after being selected to deliver stage two of Melbourne’s Monash Freeway upgrade.
Monash Freeway Upgrade
Formerly Leighton Holdings Limited, CIMIC Group Limited is the parent company of Australia’s largest project development and contracting group.
The company is an international contractor with operations in telecommunications, engineering, property, mining and environmental services industries. Cimic operates multiple brands such as UGL, CBP Contractors, Thiess and Sedgman.
After the market closed Monday evening, Cimic released an announcement to the ASX saying that CBP Contractors who are wholly-owned by Cimic had been selected to deliver stage two of the Monash Freeway upgrade.
Sometimes referred to as ‘The Carpark’ by frustrated Melbournians, the Monash Freeway links Melbourne’s CBD to the south-eastern suburbs and then beyond to the greater Gippsland region of Victoria.
The design and construction contract is expected to generate revenue of approximately $761 million to CBP Contractors and is being funded by both the state and federal governments.
Works will include the welcome addition of 36 kilometres of new lanes and the roll-out of the Freeway Lane Management System in order to better manage traffic flow. Construction is expected to begin early next year and be completed during 2022.
“Cimic Group’s construction company, CBP Contractors, has a demonstrated capability of delivering infrastructure in Victoria and beyond,” Cimic’s CEO Michael Wright said.
“The upgrade of the Monash Freeway will improve the lives of many people, saving time and better connecting communities to important employment centres.”
What Now For Cimic?
The Cimic share price has underperformed the wider market over the past 12 months, falling more than 33%. In the grand scheme of things, this latest news is relatively minor for a $10 billion company. However it does provide some positive news to help arrest the sliding share price.
With a dividend yield of close to 5% and a long track record of profitability, Cimic’s price to earnings multiple (P/E) of 13x might be seen as a good entry price for some investors. But keep in mind Cimic is a capital intensive business requiring large scale investment in machinery and projects that are prone to cost overruns and general unpredictability.
Whilst I can see the case for buying shares, especially if the share price was to go back under $30, I would prefer to own shares in companies that are capital-light with higher margins and have an ability to scale up quickly.
Companies such as lottery re-seller Jumbo Interactive Ltd (ASX: JIN) and market darling Afterpay (ASX: APT) come to mind.
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At the time of publishing, Luke owns shares in Jumbo Interactive.
