The Cimic Group (ASX:CIM) share price fell almost 11% in early Monday morning trade, before recovering to close the day down approximately 7% to $46.50. So what caused the sharp fall, and should I be worried?
What does Cimic do?
Cimic is Australia’s largest contractor, providing engineering, construction and contract mining services to the infrastructure, mining, energy, and property sectors. It’s roots go all the way back to 1899 with the business acquiring or merging with other well known engineering firms over the decades, including UGL, Sedgmen and Thiess.
Just overvalued or something more serious?
On paper Cimic has been growing at a healthy rate, with net profits increasing by 50% since 2015. However, earlier this week Hong Kong-based research house GMT Research released a note to its clients accusing Cimic of inflating its profits. GMT accused CIMIC of boosting its pre-tax profits by roughly 100% over the past two years, or $1 billion in total over the past two years, pointing to a combination of
- Aggressive revenue recognition – a high level (9%) of unbilled revenue on its balance sheet
- Acquisition accounting– Cimic is suspected of also using its $524 million acquisition of construction services group UGL in 2016, to inflate its profit. GMT points to the write down of UGL’s net assets from $331 million to a liability of $484 million
- Dodging loses from a joint venture – Cimic has stopped recognising loses from its 45%-owned stake in a Middle East joint venture (BICC) and reduced its carrying value to zero.
However, Cimic has subsequently issued a clarification statement to the ASX stating that
“…it is in compliance with its disclosure obligations. For accurate information and analysis related to the company, CIMIC advises market participants to refer to its 2018 and past annual reports, its quarterly, half and full-year financial results, and its other disclosures. CIMIC notes that its annual reports and full-year financial results are fully audited and in compliance with accounting standards”
What’ will happen to Cimic’s share price?
The contributing members to the Cimic company report on Strawman have a consensus valuation that is below the last traded price, although there is (as always) a variety of opinions.
Click the button below to see what the community is saying…
Disclaimer– The author may hold positions in the stocks mentioned in this publication, at the time of writing. The information contained in the publication and the links shared are general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. For errors that warrant correction please contact the editor at [email protected].
Strawman is Australia’s premier online investment club. Join for free to access independent & actionable recommendations from proven private investors.
© 2019 Strawman Pty Ltd. All rights reserved.
ACN: 610 908 211 | Australian Financial Services Licence (AFSL): 501223