Shares in Australian construction giant CIMIC have plunged after investment bank Morgan Stanley issued a report on the group that cast doubt on its headline accounting numbers.
The Australian Financial Review reported today that a Morgan Stanley analyst believes the firm’s reported profits could exceed its cash profits by up to 30%.
In March, CIMIC reported a net profit of A$130m ($98m) for the first quarter and said it expected that its full year net profit would be between A$520m to A$580m. However, according to the Australian Financial Review, Morgan Stanley’s analyst said: "CIMIC looks to have generated no underlying cash flow despite reporting net profits after tax of A$130 million in the period".
The investment bank’s analysts, led by Nicholas Robison, wrote in their report: "Our cash reconciliation suggests that this [profit] may not have been backed by cash, continuing a disconnect since at least 2014.
"Working capital seasonality is likely a major factor and could prove benign, although proportionally the movement is larger than in prior years.
"We thus cannot discount the potential that the around A$300m cash gap we reconcile reflects deeper underlying issues, with scope that reported profits could be greater than 30% above underlying cash flow."
Despite our efforts we continue to struggle logically and rationally to reconcile Cimic’s reported profits with cash flows or at the very least confirm that the alternative potentially negative interpretations are less plausible than the positive stance provided by CIMIC– Nicholas Robison, Morgan Stanley
The Morgan Stanley report adds that the accounts of Hochtief, the German contractor that owns 71% of CIMIC’s shares, appears to "contradict" information released by its Australian subsidiary.
Another newspaper, The Australian, noted that Morgan Stanley had attempted "at considerable length" to reconcile CIMIC’s numbers on two occasions, but the firm was "still perplexed by the detail".
It quoted Mr Robison as saying: "Despite our efforts we continue to struggle logically and rationally to reconcile Cimic’s reported profits with cash flows or at the very least confirm that the alternative potentially negative interpretations are less plausible than the positive stance provided by CIMIC."
CIMIC has not issued a formal response to the Morgan Stanley report, however it has published on its website a copy of a letter sent to financial regulator the Australian Securities Exchange, which has inquired into the unusual volume of trades in the company’s shares.
This said: "The company has no explanation for the recent trading in its securities, However, the company is aware of a broker report released yesterday [6 July]." It added that it was in compliance with the exchange’s listing rules.
CIMIC shares fell 17% in early afternoon trade before ending the day 16.5% down at A$30.25. However, this is still well above Morgan Stanley’s target of A$12.40.
Image: One of CIMIC’s recent projects is the Goldcoast light rail scheme (Via CPB Contractors, a CIMIC company)