Construction & Engineering

Higher average DWC driven by increases in average DSO and DIO that were partly offset by an increase in average DPO.

The Construction & Engineering sector has experienced a prolonged period of contraction, with the Australian Performance of Construction Index (PCI) showing nine consecutive months of negative results and a five-year low in May 2024. Builders have cited decreased capital expenditure levels and rising costs, and have been forced to focus on simplified operations, cost reduction and margin control to help preserve earnings and cash flow. Across our sample, average revenue was flat, with 42% of operators reporting a reduction in revenue in FY24. However, 92% of the sample reported an increase in both gross profit and EBITDA.

From a working capital perspective, DWC increased by 1.8 days to 41.0 days in FY24 as our sampled companies saw their customer collection cycles lengthen (DSO up 1.8 days to 58.6 days) and held more inventory (DIO up 4.9 days to 27.9 days). Those movements were largely offset by our sampled companies extending their supplier payment cycles, with DPO up 9.1 days to 59 days.

At an individual company level, the DPO performance was mixed, with only 58% of the sample increasing DPO and the overall 9.1 day increase in DPO heavily influenced by the largest companies in the sample. The average DPO in the previous year was the lowest in six years so the FY24 result represents a significant reversal and may indicate a shift away from the recent trend of paying suppliers more quickly to support supply chains. DPO of 59 days is more in line with FY22 levels. Interestingly, despite the movement in average DPO, half of our sample experienced a working capital “funding gap” in FY24, where suppliers were paid more quickly than collections were made.

Internationally, the Asian and European markets saw an increase in DWC due to movements in DIO, with our Australian sample maintaining a materially shorter working capital cycle than their international counterparts.

Going forward, operators will need to remain alert to ongoing stress across their supply chains, however the energy transition and expected increase in government infrastructure spending likely provide growth opportunities in the second half of FY25.