On 21 August 2020, a shareholder class action conducted by Phi Finney McDonald was commenced against CIMIC Group Limited (CIMIC) in the Federal Court of Australia on behalf of investors who acquired CIMIC shares during the period from 7 February 2018 to 22 January 2020 (inclusive) (Claim Period).
The action is being funded by Omni Bridgeway Limited. To register your interest in the class action, please visit the Omni Bridgeway registration page.
Background
CIMIC was formerly known as Leighton Holdings Ltd. CIMIC is Australia’s largest listed construction, engineering, mining and services company, conducting its business through a series of subsidiaries such as Thiess, CPB Contractors and UGL.
Since September 2007, CIMIC’s Middle East operations were conducted by BIC Contracting (formerly known as the Habtoor Leighton Group LLC) (BICC) in a joint venture arrangement.
FY17 and FY18 Results Announcements
In its FY17 and FY18 results, CIMIC reported “very solid cash flow generation”, “strong cash generation” and positive EBITDA cash conversion results and a “strict focus on managing working capital and generating sustainable cash-backed profits”.
On and from its 1H18 results, CIMIC did not publish financial results for BICC as a separate business segment (as it had done previously), instead combining it into the broader Corporate segment. During the FY18 period, following the introduction of a new AASB (and a revision to a pre-existing AASB), CIMIC’s investment in BICC was reduced by $245.6 million to nil value, and non-current loan receivables from BICC reduced from $1,046.3 million (at December 2017) to $539.2 million at 1H18.
In its FY18 results, whilst CIMIC disclosed that it used factoring and reverse factoring for receivables and payables, it did not quantify its factor or reverse factor balances or disclose the impact of factoring on its cash results.
Factoring involves the sale of trade receivables of a company to a third party financier for an immediate payment of a significant portion of an outstanding invoice amount. Reverse factoring involves a company’s supplier paying a fee to a third party financier to receive an outstanding invoice in a shorter time period than that offered by the company itself.
1H19 Results and Disclosure of Factoring Balance Announcements
On or around 4 May 2019, Fairfax Media published a series of articles reporting on market analysis of CIMIC. These reports stated that CIMIC had inflated profit and operating cash flow figures with “aggressive” revenue recognition practices while hiding poor performance and earnings quality through “engineering” its accounts and the use of factoring arrangements.
On 6 May 2019, CIMIC issued a “Clarification Statement” in response to the Fairfax Media reports, which confirmed its FY18 and previous financial reporting and confirmed its compliance with its continuous disclosure obligations. CIMIC did not refute the use of factoring arrangements or its use of revenue recognition practices.
On 17 July 2019, after close of trade, CIMIC released its 1H19 results to the market, which updated the market to:
- the fact that its performance in several key metrics associated with cash flow had declined; and
- the extent and level of factoring across CIMIC, with such information including a comparison to the previous reporting period ($1,994.8m at 1H19 vs $1,953.0m at FY18).
Further, in the 1H19 results, CIMIC continued to report on BICC within the Corporate segment and stated that it continued to hold shareholder loans relating to, and guarantee loan facilities provided to BICC.
The CIMIC share price declined by about 22% after the release of the 1H19 results.
3Q19 and Middle East Divestment Announcements
On 23 October 2019, CIMIC released its 3Q19 results to the market. At this time, CIMIC re-affirmed guidance on NPAT of $790-840 million, but did not provide any comment on BICC (3Q19 Guidance). CIMIC also reiterated (as they had in previous market announcements) their focus on delivering returns to shareholders, including “strong dividends.”
On 23 January 2020, before the open of trade, CIMIC released an update to the market announcing the conclusion of a ‘strategic review’ of BICC (Market Update). It announced that CIMIC had decided to ‘exit’ the Middle East region by divesting its interest in BICC. It disclosed that it would recognise a one-off post-tax impact of approximately $1.8 billion, representing CIMIC’s entire exposure to BICC.
Within the Market Update, CIMIC revised down the 3Q19 Guidance and suspended the payment of a final dividend for 2019.
The CIMIC share price declined by about 19% after the release of the Market Update.
Allegations
The class action alleges that during the Claim Period, CIMIC contravened its continuous disclosure obligations by failing to promptly inform the market of the:
- impact of factoring and reverse factoring, on CIMIC’s reported earnings, especially on cash related metrics;
- the impact of factoring and reverse factoring on the sustainability of CIMIC’s reported cash metrics; and
- extent of the financial deterioration of CIMIC’s Middle East operations.
and engaged in misleading or deceptive conduct by:
- representing that its cash generation was sustainable, when in fact, due to a large extent on its reliance on factoring and reverse factoring, that was not the case;
- representing that CIMIC would meet its 3Q19 Guidance; and
- representing that it would be able to pay a final dividend in FY19.
The class action alleges that the falls in share price value reflect the removal of “inflation” from CIMIC’s share price, and that investors who acquired CIMIC shares during the Claim Period are entitled to compensation for loss and damage they have suffered as a consequence of CIMIC’s misconduct.