Outlook On CIMIC Group Ltd. Revised To Stable Following Similar Action On #BBB/A-2# Ratings Affirmed

Stocks and Financial Services Press Releases Wednesday May 16, 2018 17:42
MELBOURNE--16 May--S&P Global Ratings

MELBOURNE (S&P Global Ratings) May 16, 2018--S&P Global Ratings said today that it had revised the outlook to stable from negative on CIMIC Group Ltd., an Australian engineering and construction (E&C) company. At the same time, we affirmed the long- and short-term issuer credit ratings of 'BBB/A-2' on the company.

We revised the outlook to stable on CIMIC following the same action on the company's Germany-based parent, Hochtief AG, because CIMIC remains a core subsidiary of the parent group. The outlook revision on CIMIC is not reflective of any change in the underlying performance of CIMIC's stand-alone credit quality.

On May 15, 2018, we revised the outlook on Hochtief to reflect the same action on its ultimate Spain-based parent, Actividades de Construcción y Servicios S.A. (ACS), following the group's investment in Abertis Infraestructuras S.A. (Abertis), jointly with Atlantia. After the transaction, Abertis will be held by a special-purpose vehicle (SPV), of which Atlantia will own 50% plus one share, ACS will own 30%, and Hochtief 20% minus one share. We view the transaction as positive for the ACS group because it will add diversification and stability to the group's profitability and operating cash flow. The outlook revision also reflects our understanding that ACS will retain control of Hochtief, and that ACS has avoided a bidding war with Atlantia over Abertis. For full details, see "Spanish Civil Engineering Firm ACS Outlook Revised To Stable On Joint Acquisition Of Abertis; 'BBB/A-2' Ratings Affirmed," published May 15, 2018, on RatingsDirect.

Although ACS will retain majority control over Hochtief, its ownership will be diluted to 50.1% from 71.7%. However, we expect ACS will keep control of Hochtief's annual general meeting and continue appointing Hochtief's top management. We continue to assess Hochtief as a core subsidiary of the ACS group because of its strong contribution: In 2017, it contributed 65% of revenues and 60% of adjusted EBITDA. Since 2011, ACS has significantly strengthened its integration with Hochtief, and aligned strategy and risk management within the consolidated group. This was further reinforced in May 2017, when Marcelino Fernández Verdes was appointed CEO of ACS while remaining CEO of Hochtief.

ACS and Hochtief's joint investment in the Abertis SPV is further indication that parent ACS is continuing to drive Hochtief's strategy and to influence the subsidiary's creditworthiness. As such, we do not view Hochtief as an insulated subsidiary within the ACS group, even though there are significant minority shareholders.

Hochtief's governance structure will likely be more complex after the transaction, and the presence of sizable minority shareholders will likely constrain cash movement within the ACS group. Furthermore, a significant part of Hochtief's dividends and cash flow will belong to minority shareholders. To determine the ACS group's credit profile and metrics, we still use ACS' balance sheet, income statement, and cash flow, which fully consolidate Hochtief, but we reflect the complex group structure and potential constraint on cash movement by haircutting Hochtief's excess cash over debt when calculating our adjusted debt figure for ACS. We also note that, based on 2017 data, ACS' funds from operations (FFO) to debt would be about four to five percentage points weaker if we were to consolidate Hochtief on a proportional basis, which would reflect more properly ACS' economic interest in Hochtief after the transaction. As a result, we believe that FFO to debt of above 30%, based on the ACS group's fully consolidated data, would be commensurate with the current 'BBB' rating.

Our ratings on ACS reflect the group's large size, geographic and business diversity, leading positions in construction markets in several countries, and ability to implement large and technically complex projects that help to offset the typical high volatility and low entry barriers in the construction business. ACS' financial leverage metrics have improved significantly over the past few years, reflecting the group's strategic decision to significantly reduce its exposure to concessions and adopt a light business model. The group focused on debt reduction through noncore asset disposals and group streamlining. Our ratio of adjusted FFO to debt for the group stood at 31% in 2016-2017, up from 23.9% in 2015 and 12.7% in 2014. We believe that ACS' credit metrics will temporarily weaken in 2018 as result of the cash disbursement for Abertis, and then recover in 2019-2020, when the group will start benefiting from dividend streams from Abertis.

Our stand-alone credit profile on CIMIC reflects the company's solid market position in Australia's infrastructure construction and contract mining sectors. In addition, it has significant business, industry, project, and geographic diversity. However, it is exposed to competitive and cyclical-heavy E&C sectors and to mining contracts that are inherently large and complex. The stable outlook on CIMIC reflects that on Hochtief.

The stable outlook on Hochtief reflects the outlook on ACS. In our view, ACS' adjusted FFO to debt will temporarily decline to about 24%-26% in 2018 and then recover to above 30% starting in 2019, reflecting the benefit of dividends from the Abertis SPV. We expect that ACS' performance will further improve in 2018-2019, thanks to a focus on cash flow generation and disciplined working capital management. We forecast the group's adjusted EBITDA margins at 7.0% in 2018, underpinned by an already secured backlog and intake of new projects, improving to about 7.5% in 2019. We view positively ACS' commitment to maintaining a conservative financial policy.

We could lower our ratings on Hochtief if we downgraded ACS, for example if ACS' adjusted FFO to debt did not recover as we expect, and instead was materially below 30% and discretionary cash flow (DCF) to debt was materially below 10%, without short-term recovery prospects. In our view, this could result from a significant project setback that might increase working capital, significantly lower dividends from the Abertis SPV than in our base-case scenario, or a much higher equity investment in the SPV than expected.

Pressure on the ratings could also arise from markedly higher debt, owing, for instance, to unexpected sizable acquisitions or higher shareholder returns than in our base-case scenario. Weakening of liquidity would also weigh on the ratings. In our base-case scenario, we assume that the ACS group will not control the Abertis SPV, but will control Hochtief.

An upgrade is unlikely in 2018 or 2019, in the absence of a track record of dividends received from the Abertis SPV. Beyond this horizon, we could raise the ratings if ACS committed to a more conservative financial policy, and we observed a track record of the group maintaining stronger credit metrics, including FFO to debt comfortably above 40% and DCF to debt close to 15%.


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