ACS/Hochtieff/CIMIC: Issues to consider
ACS (ACS SM)
ACS reports a net cash balance sheet. Despite this it is considering selling its Industrial Sales division. This is odd because it is the parent's chief cash generator. However, the group has been using multiple business and accounting tricks to create the illusion of strength. We think the business is far more fragile than it appears. The group remains reliant on the generosity of the ECB and the Spanish government, even if it is able to sell Industrial Sales to VINCI. If you are considering an investment, we suggest that you not only look at the consolidated accounts, but think about the individual companies in the group. Hocthief (HOT GR)
ACS relies on dividends from Hochtief to support group debt. The problem is that Hochtief's core cashflow is relatively modest. It relies on dividends from CIMIC, it's quoted subsidiary, to fund its own debt and pay dividends to the parent. Hochtief only appears to be solid because it is using consolidated accounting. Strip out the effects of consolidation and it rapidly becomes clear that Hocthief has a funding shortage, if it wants carry on paying the dividends that ACS needs. The core business is stable, but low margin. There is little to no chance that it can support the groups debt load. CIMIC (CIM AU)
CIMIC has used factoring, supply chain finance, off balance sheet vehicles and working capital management to cut reported debt levels. This gave the impression that the company was cash generative and could support its dividend policy. In reality, the company was being drained of cash and once it faced up to losses in the Middle East and Australia, the balance sheet was in trouble. However the recent deal with Elliott suggests that the group has not lost its taste for creative accounting. |
Important
This note is written with the sole purpose of highlighting some issues we think are important.
It is not a recommendation to BUY or SELL any of the securities mentioned and should not be taken as such.
Readers should form their own opinions about the company and seek appropriate advice.
Please read the Bucephalus disclaimer.
This note is written with the sole purpose of highlighting some issues we think are important.
It is not a recommendation to BUY or SELL any of the securities mentioned and should not be taken as such.
Readers should form their own opinions about the company and seek appropriate advice.
Please read the Bucephalus disclaimer.