Waiting for for the bust to settle

Official statistics reveal that two companies a day in the construction and building-related sector are collapsing, as late payments from creditors worsen, activity dries up and banks put the squeeze on funding.

The latest statistics on liquidations and voluntary administrations show that between June 1 and July 18 almost 100 companies in the construction and related industries collapsed, 23 of them in Victoria, 45 in New South Wales and 15 in Queensland.

The trend appears to be worsening in NSW, with 18 construction-related companies failing in June 2012, compared with 24 in June 2013 and 21 collapsing in the first 18 days of July 2013. These included such companies as JBP Construction, Paint Rite Australia, Quick Home Australia and Kona Constructions and Maintenance.

It supports the general economic statistics, which showed that in the March quarter, gross domestic product figures seasonally adjusted construction activity fell 2 per cent.

To put it into perspective, construction contributes 14 per cent of Australia's economic output.

With the mining boom over, the downturn in construction has spread from residential, commercial and government activity in the infrastructure space and is now having an impact on the broader economy.

With limited work, companies are fiercely bidding for projects and slashing prices, which is hurting margins.

When this is combined with late payments, which puts cash flows under pressure, it explains why some companies have gone belly-up.

According to the country's biggest receivables management and credit report company, Dun & Bradstreet, the trade payment terms for the construction sector are 55.3 days in the June quarter, slightly up from 55.1 days in the June 2012 quarter, and is almost double the conventional payment of 30 days.

The national average was 54.1 days in the June quarter. Late payments have a knock-on effect on the rest of the industry, including architects, subcontractors and engineers. Other D&B research reveals that the construction sector rates cash flow as the biggest issue in the next three months.

When asked specifically if cash flow would be an issue for their operations, 73 per cent said yes, and of those, 30 per cent said it would have a "significant negative" impact.

The slowdown is also playing out in the listed company space, with a spate of earnings downgrades in the mining services and construction sector in the past few months.

The latest was the downgrade by the engineering group Ausenco, which resulted in a 30 per cent smashing in the share. It follows a dive in Orica's share price last week, after announcing a 10 per cent earnings downgrade. It follows a series of downgrades in May and June from companies that include Lend Lease, WorleyParsons, UGL, Coffey, Calibre Group and Transfield Services.

Leighton Holdings is one of the few construction companies that continues to stand by its full-year earnings guidance.

The company releases its interim results on August 14, but according to Ben Brownette, at Commonweath Bank Equities Research: "Guidance is somewhat irrelevant in the context that Leighton will manage its outstanding receivables to meet that guidance."

The group's net contract debtor balance at December 31, 2012, stood at just over $2 billion, but it is believed to have increased in the past few months. Some of this can be attributed to late payments, and some relates to disputes. There has been much market speculation about the size of Leighton's under-claims in Indonesia, Australia and the Middle East. The company's share price has fallen 10 per cent in the past week.

The debt collection business Prushka estimates that in any given period, 65 per cent of liquidations arise from creditors such as the Australian Taxation Office, the State Revenue Office and other taxing agencies.

On the flip side, only 35 per cent of liquidations arise from claims by creditors who expect a return.

This suggests that the official figures represent only the tip of the iceberg of corporate insolvency. Given the time lag involved, all will be revealed in the fullness of time.