The latest note from my SharePad writing colleague Bruce Packard tweaked my interest:
“My comments on Cerillion and RBGP may seem harsh, but we’re in a bull market where often investors are prepared to accept headline numbers and not delve too deeply below the surface.”
Always worth delving deep to see what lurks beneath the headline numbers.
Bruce’s Cerillion (CER) comment:
"Risks This is a company with accruals of £8.5m at FY 2020 or 41% of revenue. There’s a chapter in Tim Steer’s book The Signs Were There on accruals accounting; management discretion plays a part in when to recognise revenue for multi-year contracts.
Accrued income is uninvoiced income and is therefore only an estimate of what the company thinks that it is owed. Support services companies like Carillion were over optimistic in the past, or the worry is management are tempted to change the accruals assumptions in order to hit their numbers, which is what Utilitywise did. This merely builds up problems for the future and inevitably ends badly.
In Cerillion’s FY to Sept 2020 accruals grew +19% to £8.5m which outpaced revenue +11% to £20.8m."
This is CER’s trade receivables note:
So yes, for 2020, £8.5m of accrued income – which represents sums recognised as revenue but have yet to be invoiced.
What is somewhat unusual is £2.4m of accrued income is non-current, which means CER has recognised non-invoiced revenue but will not receive the payment for at least 12 months. I can’t recall ever seeing a company with such non-current accrued income before.
Bruce refers to Carillion within Tim Steer’s book, which noted Carillion’s sales grew 3% over five years but accrued income soared 91% and total receivables advanced 52%:
|Amounts owed on construction contracts||321.5||614.5||91.1%|
|Amounts owed by joint ventures||128.5||59.9||(53.4%)|
|Amounts owed by jointly controlled operations||11.4||10.6||(7.0%)|
Depending on where you start from, there may be a growth mismatch between sales and accrued income at CER.
Over the last four years (2016-2020), CER’s sales are up 149%, while total accrued income is up only 53% and total receivables are up only 30%:
|Current accrued income||5,566||5,098||5,751||4,731||6,056|
|Non-current accrued income||0||768||577||2,376||2,439|
|Total accrued income||5,566||5,866||6,328||7,107||8,495|
But over the last three years (2017-2020), CER’s sales are up 30%, while total accrued income is up greater at 45% and total receivables are up greater at 41%. Not as bad as Carillion, but not ideal nonetheless.
What is unnerving is the relative size of CER’s accrued income. As Bruce notes, 41% of revenue for 2020 – suggesting perhaps 41% of revenue was yet to be invoiced and therefore of a more subjective value.
Companies typically carry c20% of revenue as trade receivables, so anything well beyond that requires some consideration. CER carries c50% of revenue as trade receivables and accrued income.
Note that CER does benefit from deferred income – payments made in advance by customers for services CER has yet to deliver:
Such deferred income came to £5.1m for 2020, so a notable amount that goes some way to counterbalancing the £8.5m total accrued income.
The receivables and payables seem to balance each other out on a cash flow basis.
Lots of working-capital trouble manifests itself within working-capital cash movements, but for CER the movements are favourable on aggregate:
For what I can tell, CER has a stark range of contract profiles – some with customers paying upfront and some with customers paying in arrears (sometimes by more than a year).
The present mix seems to balance out on a cash flow basis, but the worry is the upfront payments slow to leave cash conversion exposed as the company’s revenue recognition is not backed by customer invoices let alone the associated payments.