The Cimic Group Ltd (ASX: CIM) share price has fallen over 7% in response to some allegations made against it.
Cimic Group was formerly called Leighton Holdings. The company changed its name shortly after some bribery scandals emerged in the news and it was acquired by its majority shareholder, Spainish firm Grupo ACS. On a more positive note, Cimic is today a major international construction and mining contractor with brands like UGL, CPB Contractors, Thiess, Broad and Sedgman under its banner.
Here’s Why Cimic Shares Are Down 7%
An organisation called GMT Research has made a number of allegations about Cimic’s revenue, profit, balance sheet, almost everything.
No investor likes to read of potential problems with their investment, particularly if it’s not as profitable as it seems. Before I write about of the allegations, they are just that at this stage – allegations. I’m sure Cimic will come out with a defence after its accountants and lawyers have made their input.
Allegations Against Cimic
GMT Research said that it estimates that Cimic has supposedly inflated its profit by around 100% in the last two years with aggressive revenue recognition, acquisition accounting and avoiding accounting for joint venture losses.
The firm also said that “a lack of supporting cash flow has been obscured by the increased sale of receivables and reverse factoring of payables.
Another allegation by GMT Research is that the while the company reported net cash of 69% of equity in FY18, it supposedly actually had debt to equity of 74%.
Cimic has apparently refused to give any substantial answers to the questions GMT Research has raised.
The losses that were being reported from its 45%-owned Middle Eastern JV, BICC may also have stopped being recognised by Cimic, according to GMT Research, which may amount to $50 million a year over the past two years.
One of the most personal stabs by GMT Research was that Cimic is a major value contributor to major shareholder ACS and ACS subsidiary Hochtief. The Chairman of Cimic is also the CEO of ACS and Hochtief, management have been rewarded significantly for growing the share price, profit and operating cash flow, which (according to GMT Research) could be why Cimic has allegedly been doing the things that GMT Research is alleging.
Time To Sell?
This story probably has a long way to go, and I would certainly suggest that Cimic is innocent until proven guilty, but these are serious allegations. At this stage I would not want to invest in Cimic shares until this is cleared up, one way or another. I’d rather think about the reliable ASX shares in the free report below.
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