The Cimic Group Ltd (ASX: CIM) share price has bounced 8.66% so far today, following the news the company has appointed a new CEO.
Australia's largest construction group announced the appointment last night, after seeing its share price plummet 20% in January. Juan Santamaria will replace Michael Wright as CEO from today after the embattled construction group posted a $1 billion dollar loss. A civil engineer, Santamaria is a long-term employee of CIMIC's Spanish owners. After just two years as CEO, Wright will take on a new leadership role within CIMIC Group.
CIMIC's $1.8 billion write down
CIMIC told investors in January that it would exit its Middle East investment resulting in a $1.8 billion post tax write down. CIMIC shares fell from $34.98 to $28.03 in the wake of the announcement, having traded above $45 as recently as June 2019. The group held a 45% interest in BIC Contracting (BICC), which was unable to recover debts owed on projects built during the Dubai property boom in the early 2000s. The exit is expected to cost CIMIC around $700 million net of tax in 2020 as CIMIC's financial guarantees of BICC liabilities materialise.
Latest results
CIMIC yesterday released its annual report, which showed marginal growth in revenue, up 0.2% to $14,701 million in FY19 from $14,670 million in FY18. Net profit after tax (NPAT) was up 2.8% to $800 million if the impact of the BICC exit was excluded. After the $1,840 million BICC write-down, CIMIC recorded a net loss of $1039.9 million. Net cash fell to $831.6 million from $1,622.4 million the previous year, with CIMIC using $398 million in a failed effort to support BICC.
Reverse factoring concerns
CIMIC also revealed for the first time the extent of its use of reverse factoring, reporting that $851.3 million was reverse factored at the end of 2019, up from $561 million the previous year. Using reverse factoring, or supply chain finance, companies can arrange for suppliers to be paid by financial institutions in return for a fee. This allows companies to delay paying bills, lowering reported debt and inflating cash balances. Reverse factoring arrangements are often accounted for within trade and other payables, making it difficult to tell how much money is owed to suppliers.
Outlook
CIMIC reported that it had won $18 billion in new work in 2019 and had $37.5 billion work in hand, "providing a solid outlook for our future". According to the Australian Financial Review, however, analysts remain wary about CIMIC's outlook given its high levels of receivables. Receivables increased 14% over the year to reach $3.5 billion. CIMIC also engages in traditional factoring of receivables, allowing it be paid early by financiers for debts owed to it. In 2019, factored receivables were $1.96 billion, up from $1.95 billion in 2018 and $600 million in 2017.
