New class action lawsuit accuses CIMIC of inflating cashflow with reverse factoring

A new shareholder class action alleges CIMIC’s use of supply chain financing pumped up its cashflow and hid the true state of its business.

CIMIC has been accused of using reverse factoring to hide the true state of its cashflow.

CIMIC’s controversial use of reverse factoring is the centre of a new shareholder class action against the contracting giant, which alleges its use of supply chain financing pumped up its cashflow and hid the true state of its business from shareholders.

The new claim was lodged on August 21, just 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 lawsuit claims CIMIC’s financial reports in 2018 and 2019 used controversial supply chain financing arrangements, also known as reverse factoring, 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. CIMIC’s generation of cash receipts from factoring was not sustainable,” the lawsuit says.

The latest suit was lodged by Melbourne class-action specialists Phi Finney McDonald on behalf of shareholders who bought CIMIC shares between February 2018 and January 2020, when CIMIC booked a $1.8bn write down of its non-controlling 45 per cent stake in Dubai-based BIC Contracting joint venture, previously badged as Al Habtoor Leighton.

Alleged disclosure failures over the extent of the problems within that business are again the subject of the current class action, which claims CIMIC delayed writing down its Middle East business when it knew it had little value.

But the suit also targets CIMIC’s use of supply chain financing. In such arrangements, the company convinces suppliers to take early payment from a financier, usually in exchange for a discount on the invoice, then repays that debt to the bank at a later date.

The lawsuit says CIMIC’s failure to disclose the extent of the arrangements helped the company pump up the operating cash flow it claimed to have generated in 2017 by $558.6m, to $1.5bn, and made its cash conversion rates look far stronger than they really were.

CIMIC also failed to tell the market that its “reported cash flow metrics would likely decrease substantially as factoring and reverse factoring arrangements came to a conclusion or the strategy was wound back”, according to court documents seen by The Australian.

“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. CIMIC’s generation of cash receipts from factoring was not sustainable,” the lawsuit says.

The association of the practise with the introduction of extended payment terms has been heavily criticised for helping push small businesses to the wall. It has also been criticised for helping major users, including CIMIC, hide the extent of their trade debts from shareholders and analysts.

The extent of CIMIC’s use of reverse factoring became a major issue for the company in May 2019 when research house GMT Research accused the company of hiding the poor underlying quality of its results earnings through the use of supply chain financing arrangements.

While CIMIC noted it had used supply chain financing arrangements in its 2018 annual accounts, the lawsuit alleges the company failed to detail the extent and value of the arrangements, did not tell shareholders the use of supply chain financing was artificially inflating its cash flows and making earnings look stronger than they really were.

During the period of the alleged disclosure failures, CIMIC’s share price fell from a high of $51.78 in January 2018 to tumble as low as $28 on January 28, 2020, after the company had booked its $1.8bn write off of its Middle East business.

CIMIC said on Tuesday it “denies there is a proper basis for the claim and will defend the proceedings”.

CIMIC shares were down 37c to $21.92 at 1330 AEST.