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.
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