Shares in Cimic Group Ltd (ASX: CIM) are down 14% this year and 44% from last years' peak of more than $51, following revelations regarding the construction group's losses in the Middle East and its use of reverse factoring.
Hong Kong-based GMT Research previously claimed CIMIC inflated profits by around 100% over the last two years through "aggressive revenue recognition, acquisition accounting, and avoidance of JV losses."
Now, GMT claims, "there may be more skeletons in the closet which could result in further nasty surprises for investors."
Reverse factoring revelations
CIMIC is Australia's largest construction company and is involved in building major infrastructure projects including the Melbourne Metro and Sydney's Westconnex motorway. CIMIC has controversially employed reverse factoring whereby a financial institution acts as an intermediary to make payments to suppliers. Suppliers can present approved invoices to the intermediary for early payment in return for a discount.
The CIMIC share price dropped precipitously last year when it disclosed the amount it had reverse factored, falling nearly 20%. As at 30 June 2019, CIMIC had a factoring balance of $1.96 billion, up from $1.953 billion at the end of FY18 and $600 million at the end of FY17.
Proceeds from factoring receivables are treated as operating cash flow, the same as if they were collected from the payer. Amounts owed to the financial intermediary are booked as payables instead of debt, which artificially lowers reported debt and increases cash flow. Inflows from higher payables are treated as an operating rather than financing activity. GMT alleges that CIMIC's disclosure regarding its reverse factoring falls short as it fails to provide information on how much is outstanding under its facilities.
Longer payment terms scrutinised
Greensill, which provides reverse factoring services to CIMIC, has previously threatened to ditch clients who push out payment terms beyond 30 days. CIMIC extended the payment terms for one of its subsidiaries to 65 days last September. There are fears that this amounts to a "supplier payday lending scheme" forcing suppliers to cut their invoices in order to be paid promptly.
The practice has been criticised by politicians and small and medium business owners. Greensill has refused to say whether it has dumped CIMIC as a client as a result of its extended payment terms. However, Federal Small Business Ombudsman Kate Carnell has said her office would seek to ensure Greensill followed through. "My office has the capacity to seek documents and will be ensuring that they follow through," Ms Carnell told The Australian.
Middle Eastern joint venture losses
CIMIC shares booked another 20% fall in January when the company announced it would abandon its Middle East operations and write down the debt it was owed by $1.8 billion. GMT Research, however, believes CIMIC's disclosure around losses in the Middle East have fallen short, speculating that CIMIC may have stopped recognising losses just as performance deteriorated significantly, keeping minority investors in the dark. "CIMIC has shown itself reluctant to disclose information that might expose the underlying weakness in its performance," GMT writes.
Foolish takeaway
Companies including Rio Tinto Limited (ASX: RIO) and Telstra Corporation Ltd (ASX: TLS) have vowed to stop utilising reverse factoring, while politicians and regulators are pushing back on the practice. This leaves CIMIC under increasing pressure to either step back from its reverse factoring practices or provide full disclosure in relation to them.
