Construction & Engineering

Reduced working capital, a result of shorter collection cycles (lower DSO) and better inventory management (lower DIO) offset somewhat by paying suppliers more quickly (lower DPO).

The Construction & Engineering sector continued to benefit from increased activity levels in 2018, with 81% of the sampled companies experiencing growth in both revenue and EBITDA. We have also seen some market consolidation during the year, with a number of companies growing revenue via acquisitions.

The average DWC of our sampled companies fell by 4.6 days to 60.7 days in 2018, with 56% of the sample showing improvements. The DWC reduction was driven by an average 5.1 day shortening of the debtor cycles (lower DSO) and more efficient inventory management (DIO reduced by 4.2 days). However, only 50% of the sample was able to improve DSO. This suggests that there is further room for improvement in an area that requires close attention for companies operating in this sector, particularly the management of WIP and its conversion to billings (and ultimately cash). 94% of the sample reduced inventory in 2018 releasing $326 million in cash.

The combined benefit of DSO and DIO improvements was partially offset by a reduction in average DPO of 5.5 days, as companies utilised additional cash to pay suppliers faster. This sector is characterised by a supplier payment cycle that is materially shorter than the customer collection cycle (a structural “funding gap”). The challenge to reduce this gap will only increase if residential construction slows (as has been recently reported) and proposed changes to the Security of Payment Act (SOP Act) are made, which are likely to further shorten supplier payment cycles (to subcontractors). This reinforces the need for efficient contracting, billing and collection processes or market participants may come under liquidity pressure.

Across our sample, RCR Tomlinson experienced the greatest improvement in 2018, achieving a reduction in DWC of 48.8 days that was driven by improved collections (DSO down by 30.8 days). Downer EDI was another strong performer, unlocking $765 million in additional cash by improving DWC by 23.2 days. This demonstrates the benefit of maintaining a commitment to collections in periods of revenue growth.

At the other end of the sample, Ausdrill recorded the largest increase in DWC (15.2 days) due to a higher working capital load required to service new projects in Africa.