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CIMIC Group Limited Annual Report 2016 |
Operating and Financial Review
OPERATING ENVIRONMENT OUTLOOK
(CONTINUED)
MINING & MINERAL PROCESSING MARKET
The Australian Government’s Resources and Energy Quarterly reported in September 2016 that: “The outlook for Australia’s production
of bulk commodities remains generally positive, despite challenging conditions facing most producers. Production of iron ore is forecast
to grow over the next year … Metals production is largely expected to increase over the outlook period, led by growth in gold, copper and
alumina … the outlook for Australia’s energy commodities is mixed. LNG production is forecast to continue to increase in line with growth
in export capacity ...”
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. The oil and gas sector is transitioning from construction into operations and maintenance, creating further
services opportunities.
Whilst there have been recent commodity price increases, uncertainty about price forecasts and price sustainability means the market for
mining and minerals processing remains challenging. However, the Group remains in a strong position to capitalise on opportunities as
they arise in the mining and minerals processing markets. Long-term client partnerships, the successful negotiation of contract extensions
and the Group’s competitive position provide confidence for the future. CIMIC plans to increase its market and commodity diversification
and is analysing several growth opportunities.
Investment levels in the mining market appear to be stabilising. The Reserve Bank of Australia notes “… the largest subtraction of mining
investment (net of imports) from GDP growth looks to have already occurred; the ABS (‘Australian Bureau of Statistics’) capital
expenditure (capex) survey of investment intentions and Bank liaison point to a smaller subtraction in 2016/17”
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. The ABS survey points
to an expected capex spend of $39.9 billion for 2016-17, down from an actual spend of $53.4 billion in 2015-16
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.
SERVICES MARKET
The size of the market for infrastructure maintenance services in Australia is estimated at $20.5 billion having grown by 6.6% per annum
during the past five years
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. Continuing investment in infrastructure development and an increase in the proportion of the Australian
market that is outsourced (currently around 50% which is low relative to other developed countries), is expected to result in
infrastructure maintenance services growth of 3.5% per annum until FY22
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. The highest growth is projected for service providers that can
leverage systems, technologies and client relationships to implement best practice in service delivery.
The Australian Government’s Defence White Paper released in February 2016, indicates an increase in funding for maintenance of the
Defence Estate. Furthermore, substantial investment is expected to be made by the Australian Government in specialist defence
equipment (e.g. tanks, ships, aircraft) and supporting infrastructure over the medium to long term, which is expected to result in
increased demand for asset maintenance services.
Through its acquisition of UGL, CIMIC is well positioned to grow its services capabilities in existing and new markets by benefiting from
the Group’s complementary activities. As well, there is expected to be additional growth in services opportunities in the road and rail
infrastructure, oil and gas, water, defence and renewable energy markets.
FUTURE DEVELOPMENTS
GROUP PROSPECTS
CIMIC is a leading provider of construction, mining and mineral processing, services, PPP and engineering in Australia and overseas. The
opportunities in these sectors provide the main longer-term drivers for the Group, particularly as governments in Australia-Pacific and
Asia roll out initiatives to address significant infrastructure deficits.
The Group remains focused on improving project delivery, with a clear focus on cash, profitability and sustainability, and on the
development of its PPP business. Also, the Group continues to analyse local merger and acquisition opportunities to support its
development and future growth.
The pipeline of infrastructure projects (many of which will be delivered through PPP models) remains high, underpinning demand for the
Group’s activities. In the short-term, the Group’s competitive position and work in hand provide a solid base for future revenue and
profitability.
While the opportunities in our existing markets will continue to be the primary drivers of demand for the Group, CIMIC continues to
consider opportunities to expand into new regions and markets, where it can leverage its existing capabilities.
GUIDANCE
2017 NPAT is expected to be within the range of $640 million to $700 million, subject to market conditions, an increase of 10% to 21% on
FY16.
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Australian Government Department of Industry, Innovation and Science (Office of the Chief Economist) Resources and Energy
Quarterly, September 2016.
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Domestic Economic Conditions, November 2016 p.30 – RBA.
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Private New Capital Expenditure and Expected Expenditure, Australia, Sep 2016 – ABS.
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IBISWorld Industry Report OD5330,
“Infrastructure Maintenance Services in Australia”
, November 2015.
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