MENU

Cimic Group Ltd shares crash on accounting concerns

Credit: World Bank Photo Collection

Shares in $13 billion construction giant Cimic Group Ltd (ASX: CIM) are down 17% in afternoon trade after a Morgan Stanley analyst reportedly questioned its headline accounting numbers. CIMIC is the former Leighton Holdings Group and is majority owned by the overseas Hochtief construction group.

The Australian Financial Review is reporting that a Morgan Stanley analyst believes the firm’s reported profits could exceed cash profits by up to 30 per cent. Statutory or reported net profits for companies often do not reflect the underlying cash flows of a business, as they reflect non-cash items and accrual accounting practices used to forecast revenues, among many other things.

The CIMIC Group reports on a calendar year basis and for the quarter ending March 31 2016 it reported a net profit of $130 million and guided for a full year net profit of $520 million to $580 million. However, according to the AFR, Morgan Stanley’s analyst believes that: “CIMIC looks to have generated no underlying cash flow despite reporting net profits after tax of $130 million in the period”.

The company is due to report its half-year FY16 result later this month, although it seems investors aren’t waiting around for it with the stock tumbling today and Morgan Stanley also reportedly questioning the group’s ability to sustain margins in the competitive construction tender industry.

The company’s recent history includes boardroom battles, corruption allegations, questions over executive remuneration, and now concerns over the accounting practices. All this means the company has more baggage than Louis Vuitton and is the kind of stock that investors are best served avoiding.

Morgan Stanley has reportedly revised its price target on the business to $12.40, which suggests the shares could come under more selling pressure at least until its half year results are revealed later this month.

3 Rotten Shares to Sell, and 1 to Buy Today

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks.

Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.