Waiting 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…
Official figures show the construction sector is under heavy strain: almost 100 construction and related companies collapsed between June 1 and July 18 (23 in Victoria, 45 in NSW and 15 in Queensland), and construction activity fell 2% in the March quarter. Because construction makes up about 14% of Australia’s economic output, a downturn in this sector can ripple through the broader economy and affect listed construction and mining‑services stocks.
The article points to a mix of factors: less available work since the mining boom ended, aggressive bidding and price cutting that squeeze margins, late payments from clients that strain cash flow, and banks tightening funding. Combined, these pressures have pushed some companies into liquidation or voluntary administration.
Dun & Bradstreet data shows trade payment terms in construction averaged 55.3 days in the June quarter (up from 55.1 a year earlier) — nearly double the conventional 30‑day payment. These extended payment times put cash flows under pressure and have knock‑on effects for architects, subcontractors and engineers.
D&B research reported that 73% of firms expect cash flow to be an issue for their operations in the coming months, and of those, 30% said it would have a 'significant negative' impact. The construction sector rated cash flow as the biggest issue in the next three months.
The slowdown has led to several earnings downgrades among listed firms. The engineering group Ausenco cut guidance and its share price plunged about 30%; Orica announced a 10% earnings downgrade and saw its share price fall; other companies reporting downgrades in May and June include Lend Lease, WorleyParsons, UGL, Coffey, Calibre Group and Transfield Services. Leighton Holdings has so far stood by full‑year guidance but its shares fell about 10% in the week referenced.
Leighton was keeping its full‑year earnings guidance and was due to release interim results on August 14. At December 31, 2012 its net contract debtor balance was just over $2 billion and is believed to have increased since — some of that rise is attributed to late payments and disputes, which investors should monitor when assessing risk.
According to debt collection business Prushka, about 65% of liquidations arise from creditors such as the Australian Taxation Office, state revenue offices and other taxing agencies, while only 35% arise from creditors seeking a return. That suggests official liquidation figures may understate the wider problem of corporate insolvency.
The article suggests more failures may emerge over time because of reporting lags and ongoing pressures (late payments, reduced activity and tighter bank funding). It notes that current official figures may be 'only the tip of the iceberg' and that the full extent of corporate insolvency will become clearer with time.
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