CIMIC hiding WestConnex blowout, internal documents reveal

CIMIC is hiding tens of millions of dollars in losses connected to its flagship WestConnex, documents show.

CIMIC, controlled by Spanish giant Grupo ACS through its subsidiary Hochtief, has been under intense market scrutiny.

Construction heavyweight CIMIC is hiding tens of millions of dollars in losses connected to its flagship WestConnex infrastructure project from investors.

Confidential internal budgets obtained by The Australian show a cost blowout on the first stage of the Sydney motorway had left the company on track to lose up to $12 million in August last year, with the loss widening to nearly $27m by December.

Those losses — compared to an original forecast profit of $26.43m — do not include a ­further $30m in “red risk” costs which have not been factored in, but are more than 80 per cent likely to occur, the documents ­reveal.

Company insiders have suggested that loss, of about $50m for the joint venture with Italian construction firm Rizzani de Eccher, may have widened to $100m.

CIMIC, previously known as Leighton Holdings, declined to comment. It has recently replaced the project’s director.

The company, one of the ­largest construction companies in the country, has successfully bid for a number of major infrastructure contracts in the last year, ­including work on the Gold Coast light rail, as well as the ­Victorian ­government’s level-crossing removal project in ­Melbourne.

In a more detailed budget ­forecast circulated internally last year, the joint venture outlined how the original $236.4m ­construction budget for the first stage of WestConnex had ­potentially increased — excluding risk — to $257.3m. The largest blowouts were due to cost problems at the precast concrete yard, with ­drainage and with the reinforced walls.

A second document, titled “overall project outlook”, canvases three scenarios, ranging from a loss of $1.98m to $12.18m.

Despite this, the official budget for the project at the time showed costs were under control and the final margin would be the same as originally forecast.

CIMIC, which is controlled by Spanish giant Grupo ACS through its subsidiary Hochtief, has been under intense market scrutiny after missing earnings expectations for the first six months of the year.

The company, earlier this month, revealed a 3 per cent rise in net profits for the first half of the year despite revenues falling by nearly one third.

The rise in profit was significantly aided by the integration of Sedgman, with CIMIC sharply revaluing upwards the carrying value of its 37 per cent stake it held in the engineering group before its takeover.

CIMIC is trading about 25 per cent below its May high of $39.06 per share, although an aggressive buyback program has pushed ­securities higher.

They closed at $29.24 per share on Friday, a one-day increase of 1.7 per cent.

It is understood that losses on the first stage of the WestConnex project, which is worth about $350m, are more acceptable to management because it places the company in a favourable ­position to win work on subsequent, more lucrative, stages.

The total cost of construction for the entire motorway stands at about $17 billion, with the first stage the widening of the current M4 from two to four lanes.

A spokesman for the Sydney Motorway Corporation, the state government body overseeing the motorway development, said “robust procurement strategies” were developed for each stage of the project “to ensure we maximise competition and drive value for money”.

“(We are) committed to providing the best outcome and value for money for the people of NSW in relation to all aspects of the WestConnex project,” he said.

“SMC retained a probity auditor to oversee the tendering process who confirmed their satisfaction with its execution.”

CIMIC, along with the China Communications Construction Company-owned John Holland and Samsung C&T, has been awarded a further stage worth $900m.

Last November it successfully bid for the $4.3bn southeastern stage of the project alongside Samsung C&T and Italian firm Dragados, also owned by Grupo ACS.

The work is partly funded by private debt from institutional lenders including the Commonwealth Bank, the National Australia Bank, Westpac and Credit Agricole.

Meanwhile, Macquarie has been engaged by the NSW government to find $1.5bn in private capital to fund the remaining parts of the road.

The budget blowout on the first stage of construction follows revelations published by this newspaper earlier in the year that millions of dollars in payments owed to a slew of contractors had not been paid or were months late.

Analysts, most notably at Morgan Stanley, have queried CIMIC’s cash flow and accounting practices repeatedly in the past year.

Nicholas Robison, an equities analyst at the investment bank, wrote to investors earlier this month warning of a “disconnect” between CIMIC’s reported profitability and cash flow.

Mr Robison also said there was “an inexplicable disconnect between CIMIC’s margins and those of the broader domestic peer group”.

Others, including Citi analyst Simon Thackray, have also noted that the company’s management has “moved away from previous discussions of underlying performance to talk to company performance inclusive of accounting acquisition gains and asset sales”.

Mr Thackray, who recommends investors sell company shares, said there was a “lack of visibility to the drivers of earnings” and that “diminishing disclosure (has created) undue risk for minority shareholders”.