DSO 5.1 ⇑
DIO 1.1 ⇓
DPO 1.3 ⇑
DWC 1.1 ⇑
Challenging trading conditions and slower collections from customers were partly offset by lower stock levels and slower supplier payments.
The Construction & Engineering sector contracted significantly in 2021 with average revenue declining 21.7% across our sample of sector participants. Just over half of the sample experienced a fall in revenue of 10% or more compared to 2020. A key driver was the lower activity levels brought on by COVID in H2 2020, the effect of which continued to impact H1 2021. Pleasingly, the Performance Construction Index (PCI) bounced back in H2 2021 to 55.5 points at June 2021 (20 points higher than at June 2020), which supported a slight recovery in revenue and earnings during the second half of the year.
The challenging conditions saw average working capital cycles extend 1.1 days to 36.9 days, primarily due to slower customer collections. Over two thirds of the sample took longer to convert WIP and billings into cash, resulting in a 5.1 day increase in average DSO (to 66 days). This was partly offset by reduced inventory levels (DIO down 1.1 days) and slower supplier payments (DPO up 1.3 days). However, on average, cash was still collected more quickly from customers than pre-COVID levels, signalling that the focused effort on debtor management during 2020 wasn’t completely unwound.
We noted a mix of working capital metrics across our sampled companies (with the results of CIMIC, Lendlease and other larger operators skewing some of the results). Notably, there was close to three months’ difference between the shortest and longest working capital cycles, highlighting the comparative advantage that good working capital management can provide. Approximately 60% of our sample showed a structural “funding gap” in 2021 (where companies paid their suppliers more quickly than they collected from their customers), meaning efficient billing and collections processes are essential to avoid the gap widening. In periods of fluctuating activity and revenue (as has been experienced during COVID), those processes are put under more pressure.
From an international perspective, the average DWC of our sampled companies was 2 – 3 times shorter than their Asian and US counterparts, and c.10 days shorter than their EU counterparts.
Looking forward, recent COVID lockdowns in NSW and Victoria will likely see a continuing of the softer conditions in the short term and new projects pushed into next year. Infrastructure spend is expected to contribute to higher activity levels, as Government focus shifts back to economic recovery and projects already in the planning stage become ‘shovel ready’. This will bring working capital management into even greater focus for management teams as supply chain stability and input price rises become the key operating issues for 2022.
“…experienced vastly different cash flow conversion rates over the last two financial years as a result of the initial impact of COVID and the subsequent recovery therefrom, and the effects these events have had on the Company’s activity and working capital levels.”
Monadelphous Group Limited
FY21 Investor Presentation
AVERAGE DWC BY SECTOR
*A positive cash impact is a “release” of cash from working capital (improvement). A negative cash impact is additional cash invested or “locked up” in working capital (deterioration).
|Construction & Engineering - Financial Year|
|Construction & Engineering - Half Year|
|Days||H1 2021||H2 2021||Change|
|Best & Worst|