In this issue of KPMG’s Restructuring Services newsletter, we focus on the potential opportunities and headwinds in the construction sector.
This edition looks at the top headlines in the construction industry, including:
|The slowdown in the residential building sector may be further impacted by the current Royal Commission inquiry on lending practices. Regulatory changes in this area will particularly hit builders who target urban sprawl developments, where homeowners are often able to borrow up to 95 percent of the value of the property.|
|Companies experiencing low and/or decreasing operating margins are facing additional pressure with growing labour costs. Declining margins will increase pressure on longer term contracts, due to above-trend cost escalation over the duration of the job. Smaller companies who base prices on the historical cost of delivering similar jobs will be exposed.
Balance sheet strength for top performers is likely to come at the expense of the bottom performers in the construction value chain.Provided the construction sector has an interrelated supply chain of materials and labour, the tactics of one will often impact another company up and down the value chain.
When comparing the payables (DPO) performance of the top 10 companies, to the receivables performance (DSO) of the bottom 10, it can be seen that an improving cash performance of the top companies may be causing cash and working capital pressures for those at the bottom. The differential in payables days for the top 10 and receivables days for the bottom 10 is now the widest it has been since 2013.
|As the pipeline of residential building slows, cash flows will be squeezed as cash outflows are needed to finish off existing work and cash inflows from advanced payments slow.|