Friday 28 November 2008

Construction Industry Woes

Many of the 2,000 firms in DP Info’s study have high debt, little cash and weak profitability

1 comment:

Guanyu said...

Construction Industry Woes

Many of the 2,000 firms in DP Info’s study have high debt, little cash and weak profitability

By Joyce Teo
28 November 2008

The local construction industry could already be in serious trouble heading into the economic downturn, new data from DP Information Group (DP Info) shows.

Ironically, the seeds of the problem were sown during the recent construction boom as firms snapped up projects using short-term credit to get things moving.

As a result, many are heavily reliant on this short-term credit.

And they now face the risk of defaulting on repayments, should banks further tighten credit as times get tougher, the credit and business information firm said.

This finding was based on an analysis of the audited financial results of more than 2,000 construction firms lodged this year.

About three in four have an annual turnover of $10 million or less. The other 24 per cent are over $10 million.

Overall, about 6,000 firms make up the construction industry here.

The analysis of the data found that many companies face not just one but multiple financial problems.

These include: high levels of debt, low levels of liquidity and weak profitability.

All these are all tell-tale signs of pending financial trouble, said DP Info. Managing director Chen Yew Nah said: ‘The research is a warning sign for the construction industry and while it does not mean a large number of firms will fall, it does mean they are vulnerable to collapse if their position deteriorates.’

DP Info’s research showed that 45 per cent of the construction firms surveyed rely on short-term loans.

Of these firms, slightly more than half have debt levels that exceed the cash levels they have in the bank.

This means that 27 per cent of all construction firms surveyed are likely to face financial difficulties if their short-term credit is denied or if the repayment terms are shortened.

Construction firms also face weak levels of liquidity. Of those surveyed, 45 per cent had less than $100,000 in cash.

Of the firms relying on short-term loans, about 59 per cent of them with more than $100,000 in debt have less than $100,000 of cash at the bank.

A third weakness is profitability. About 35 per cent of construction firms reported net losses while 51 per cent have accumulated losses.

Many construction firms do not have strong balance sheets in any event, but during the boom in the past two years, they took on more projects using short-term loans, said Ms Chen.

‘The high level of dependence on short-term debt and the staggered pattern of receipts mean the construction industry will face difficulties if short-term credit dries up,’ she said.

Many financial institutions may be reluctant to renew or extend credit if project sales are slow.

If credit lines of constructions firms dry up, they may not be able to pay their sub-contractors or other firms promptly.

‘What is needed is a coordinated effort by the Government, the industry and financial institutions to respond to the unique problems faced by the construction industry,’ said Ms Chen.

For instance, an industry-specific response is required to ensure that the funds made available by the Government are best used.

The Government recently said it will help make available $2.3 billion worth of loans to help firms ride out the economic slowdown.

‘Bankers need to articulate clearly what are the products available to help the sector, for example,’ said Ms Chen.

Small construction firms are not likely to default as their debt exposure should not be extensive if their debt is related only to committed construction project works, said Singapore Contractors Association executive director Simon Lee.

Ms Chen said cash flow is emerging as a problem at some construction firms since they are not getting paid on time. ‘Once you’re in default, you have negative cash flow and are no longer a viable company,’ warned Ms Chen.

Some firms have folded because of negative cash flow, even if they still have business to do, she said.

The construction industry is just an example of an industry with unique needs. Other industries such as manufacturing and transport may also face problems due to their reliance on debt to finance assets and equipment.

Efforts to assist each industry can be better targeted if research identifies where the problems lie, said DP Info.