CIMIC cuts back ‘supplier payday lending’ by more than $700m

Construction giant CIMIC has slashed its use of the controversial practice of supply chain financing.

Construction giant CIMIC has slashed its use of the controversial practice of supply chain financing by more than $700m, to $146m in the year to date.

It comes two months after CIMIC was hit with a shareholder class action, which alleges the company’s use of supply chain ­financing pumped up its cashflow and hid the true state of its business from shareholders.

In its latest earnings update, CIMIC trumpeted it had heavily wound back the practice (also known as reverse factoring and which the Finance Department has said is “economically similar to payday lending”), slashing its supply chain balance by $705m, in the year to date, and $561m year-on-year to $146m.

The feat made the list of its top 13 achievements made in the nine months to September 30.

“Our focus remains on closely managing capital expenditure and working capital, and generating sustainable cash-backed profits,” CIMIC group chief executive Juan Santamaria said about the earnings period.

The group’s shares rose 9.2 per cent on Friday to $22.17.

CIMIC has been under pressure to dump or dramatically alter its supply chain financing arrangements after its financier, billionaire Lex Greensill, threatened to tear up contracts with ­clients if they used his product to blow out payment times to suppliers beyond 30 days.

The threat prompted CIMIC to announce it was reviewing its supply chain financing arrangements, which involve its smaller suppliers paying a fee if they want to be paid in fewer than the standard 65-day terms in place across some of its divisions.

But Friday’s earnings update made no mention of the review.

CIMIC was hit with a shareholder class action on August 21, four months after CIMIC paid $32.4m to settle an earlier class action suit over allegations senior executives misled shareholders by concealing their knowledge of corrupt conduct in its Middle East businesses.

The latest lawsuit claimed CIMIC’s financial reports in 2018 and 2019 used controversial supply chain financing arrangements to pump up its reported earnings and obscure the amount of cash its operations were actually generating, artificially inflating its share price.

“CIMIC’s reported earnings were largely a result of cash generated from the receipt of factoring, not a result of cash generated from operating activities,” the lawsuit says. “CIMIC’s generation of cash receipts from factoring was not sustainable.”

Although CIMIC generated $9.3bn in revenue in the nine months to September 30, versus $10.7bn for the same period in 2019, executive chairman Marcelino Fernandez Verdes said the group had returned to growth.

In the third quarter of 2020, he said revenue rose 8 per cent after COVID-19 led to a “slowdown of revenues across our activities, both domestic and overseas, and a temporary delay in award for some new projects”.

“We are seeing improved operating conditions, which is providing momentum as we enter the last quarter of the year,” Mr Fernandez Verdes said.

“Governments have announced numerous stimulus packages in our core construction and services markets, with additional opportunities through the strong public private partnerships pipeline, and the mining market is proving resilient.”

Mr Santamaria said CIMIC had a “solid level of work in hand” of $35.5bn — equivalent to more than two years’ revenue — with project wins in the third quarter including mining services at Mount Owen in NSW, building and infrastructure projects in India and Australia, and resources and water infrastructure projects in Western Australia and Queensland. “We continue to work with governments to progress the future infrastructure pipeline and to support our clients to fast-track and deliver projects in construction, services and mining,” Mr Santamaria said.