Downer Upgrades Profit Outlook
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A relief rally for Downer EDI shares when the company provided a trading update and new guidance after its protected takeover of Spotless which didn’t reveal any disasters.
The company said the first four months of Spotless’s “consistent and predictable” trading was broadly in line with its expectations.
The company said at the start of this month that it would be issuing updated guidance based on four months of trading at Spotless and its own businesses.
In fact Downer shares jumped 5% to $7.067 (in a broadly flat market) after the engineering group said it had found larger-than-expected cost savings following its Spotless purchase.
Downer, which owns an 87.8% stake of Spotless since finalising its takeover in August, but Spotless shares didn’t rise in tandem with Downer - its shares ended down 0.9% at $1.10. Downer shares had been as low $1.085 at one stage in early trading.
The holdout shareholders will not get richer waiting out Downer, or so it seems.
Downer itself is expected to deliver a $195 million net profit, $5 million more than the guidance provided before it completed the partial takeover of Spotless in August.
Spotless will contribute net profits after tax of $85 million - at the bottom end of the range previously provided by the Spotless board of $85 million and $100 million. The combined group is expected to report annual net profit after tax of $295 million, excluding the amortisation of acquired intangible assets.
But the company says it now expects Spotless’s profit to be at the bottom end of its previously issued $85 million to $100 million forecast after deciding to record almost $80 million in costs and impairments at the cleaning and catering firm - that is a deliberate decision and should not be seen as significant.
The $80 million seems to be a bit of ‘kitchen sinking’ by Downer management (which involves rounding up so many costs etc and announcing them soon after completely a takeover or change of management).
The figures hit includes redundancy and transaction costs, a goodwill impairment against Spotless’ laundries business and a write-off of the new Royal Adelaide Hospital contract.
Downer said its 30 year contract at Royal Adelaide Hospital, which is in the first year, has been underperforming since operations started in September.
It is working to address the issues and expects the work to take several months.
"It is expected that there will be no earnings from this project recognised in the 2018 financial year," the engineering group said in a statement on Monday.
Despite this, Downer’s total 2018 net profit after tax guidance of $280 million exceeds the market expectation of around $265 million
Downer said it plans to refinance Spotless’s debt and performance bonding facilities for next year.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.