Clough profit reversal amid cash crunch ‘will affect working capital’

Clough will reverse profits at its next results after belatedly discovering problems at its Waitsia gas project in WA and at the $1bn Project Traveler chemicals plant in the US.

Webuild – Clough’s partner in the federal government’s giant Snowy 2.0 hydro expansion project – is in talks to finalise an agreement to buy the WA household name.

Clough will be forced to reverse profits declared in its financial statements due to the belated discovery of problems at two major contracts, according to the West Australian contractor’s South African parent company, and amid an “ongoing and urgent” cash flow crisis.

Murray & Roberts issued a statement to the Johannesburg stock exchange ahead of its annual shareholder meeting, overnight on Thursday (local time), confirming both it and Clough would reverse the profit figures in its interim results for the six months to December 31. That follows the discovery of “margin deterioration” at its Waitsia gas project in WA and at the $1bn Project Traveler chemicals plant in the US.

“The impact from this margin deterioration is that profits recognised on these projects in previous financial years would have to be reversed,” the company told shareholders. “The reversal of previously recognised profits also impacts working capital.”

Clough uses an accounting system that allows the company to include “uncertified” revenue in its accounts – effectively work that has been completed, but which its client has not yet checked paid out on.

Any discovery of major contract problems, such as those at Waitsia and Traveler, would be enough to force Clough to reverse its treatment of revenue from those contracts, hitting its future profits.

While commonly used within the construction and contracting industries, the incorporation of uncertified revenue remains controversial.

The accounting practice was blamed for helping mask financial problems at UK construction group Carillion ahead of its 2017 collapse, after it was later discovered that more than 40 per cent of the £729m revenue reported in its accounts was uncertified revenue – including unapproved variations and other claims submitted to clients – that was never likely to turn into a cash payment.

This week Murray & Roberts chief executive Henry Laas told a South African business publication he did not expect either Traveler and Waitsia to be loss-making when completed by the middle of 2023, blaming the issues on disruptions caused by Covid-19.

“When you look at larger infrastructure projects – such as a power or a chemical plant – these contracts always provide clauses where, if there’s variation on a project, you’d get compensation,” he said.

“But where it becomes very difficult is when you’re disrupted, because you need to be able to prove cause and effect.

“We don’t think (Traveler and Waitsia) are going to be loss-making but it’s just that we have recognised profits on them in the past and may have to reverse it, and there’s also cash that goes along with it.”

Murray & Roberts told shareholders Clough was still talking to its clients at the two projects – Next Wave Energy Partners in the US, and Mitsui and Beach Energy in Australia – over a way forward on the troubled contracts.

But the company said it was not likely to fund a rescue package for Clough by raising capital on the South African market, despite the cash crunch faced by the WA contractor.

“As previously announced, the group is continuing to review several strategic options with respect to addressing the ongoing and urgent cash flow needs,” Murray & Roberts said.

The Australian revealed this week that Clough was nearing a rescue deal from Italy’s Webuild, its joint venture partner in the federal government’s giant Snowy 2.0 hydro power project.

Webuild is in talks finalising an agreement to buy the WA household name, in a deal which would stave off a snowballing financial crisis at Clough.

Clough declined to comment on Friday.