Waiting for for the bust to settle
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.
Frequently Asked Questions about this Article…
The article says collapses are driven by a mix of factors: falling activity since the end of the mining boom, banks tightening funding, fierce bidding that slashes margins, and worsening late payments from creditors that squeeze cash flow. Those combined pressures have pushed many smaller and mid-sized construction firms into liquidation or voluntary administration.
Official statistics cited in the article show almost 100 construction and related companies collapsed between June 1 and July 18. Of those, 45 were in New South Wales, 23 in Victoria and 15 in Queensland. Examples of failed NSW firms mentioned include JBP Construction, Paint Rite Australia, Quick Home Australia and Kona Constructions and Maintenance.
Yes. Research from Dun & Bradstreet in the article shows average trade payment terms in the construction sector were 55.3 days in the June quarter (slightly up from 55.1 days a year earlier), which is nearly double the conventional 30-day term. The article also notes late payments create knock-on cash‑flow issues for architects, subcontractors and engineers.
Construction represents about 14% of Australia’s economic output. The article cites seasonally adjusted data showing construction activity fell 2% in the March quarter. With the mining boom over, the slowdown has spread across residential, commercial and government infrastructure work and is now weighing on the broader economy.
The article reports a spate of downgrades in the mining services and construction sectors. Notable examples include Ausenco (whose downgrade led to about a 30% share fall) and Orica (which announced a 10% earnings downgrade and saw its share price dive). Other companies named as having downgraded recently include Lend Lease, WorleyParsons, UGL, Coffey, Calibre Group and Transfield Services.
Leighton was one of the few construction groups still standing by full‑year earnings guidance at the time of the article. Its interim results were due on August 14. The group had a net contract debtor balance of just over $2 billion at December 31, 2012 (believed to have risen since), and the stock had fallen about 10% in the prior week amid market speculation over under‑claims in regions such as Indonesia, Australia and the Middle East.
According to the debt collection business Prushka cited in the article, about 65% of liquidations in any given period arise from creditors such as the ATO, state revenue offices and other taxing agencies. Only about 35% arise from creditors who expect a return. That suggests official liquidation figures may understate the full extent of corporate distress and that more insolvency problems could surface over time due to reporting lags.
The article highlights several investor‑relevant risks to monitor: worsening cash flow and rising receivable days (late payments), contracting activity after the mining boom, margin pressure from aggressive bidding, banks tightening funding, and earnings downgrades from listed engineering and services firms. It also flags large receivable balances and disputed claims at major contractors (for example Leighton) as items that can influence share performance.
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