Construction & Engineering

Minimal overall movement in DWC masked some material movements in underlying working capital elements, with improved DSO and DIO offsetting a reduction in DPO.

It was a challenging year for the Construction & Engineering industry in FY23, with corporate insolvencies increasing by 72% (from FY22) to reach a 10 year high, driven by rising interest rates, input cost inflation and labour shortages. Poor weather in some regions and economic uncertainty more broadly resulted in project delays and deferrals, impacting activity levels and profitability.

Notwithstanding the above, our sampled companies were able to successfully pass on a 16% increase in direct costs to their customers in FY23 and maintain flat average margins relative to FY22 (24% gross margin and 7% EBITDA margin). Notably, our sample are listed entities, with many smaller operators experiencing material margin compression.

From a working capital perspective, DWC decreased by 0.6 days to 38.9 days in FY23. This incremental net change masked larger offsetting movements in DSO, DIO and DPO. Our sampled companies shortened their customer collection cycle (DSO down 6 days to 56.9 days) and held less inventory (DIO down 2.9 days to 22.8 days), but paid suppliers more quickly (DPO down 9.8 days to 50.2 days).

Lower DSO was recorded by 92% of our sample, reflecting process improvements but also a willingness by government agencies and developers to work with head contractors and expedite milestone payments. Interestingly, the increased discipline around billing and collections allowed companies to pass on the benefit to their suppliers, with 83% of our sample reducing DPO. In fact, average DPO in FY23 was the lowest it has been in six years, indicating a reversal in recent trends influenced by COVID lockdowns and the response by construction companies to defer supplier payments to improve their own cash flow. The result was the re-emergence of the "funding gap", where suppliers were paid more quickly than collections were made.

Internationally, the Asian and European markets saw an increase in DWC, with our Australian sample maintaining a materially shorter working capital cycle than the international sample. Going forward, we expect to see costs stabilise as demand across the sector falls, however there will likely be growth opportunities in renewable energy and the build to rent markets.