Downer Manages Expectations

In contrast to the whacking handed out yesterday to shares in companies like Programmed Maintenance Services (PRG) and Macquarie Group (MQG), investors chased Downer EDI (DOW) shares higher yesterday despite a weak interim result and a small trim to full year guidance.

The shares ended up rising 8.8% yesterday to close at $3.21 as the company reaffirmed that it would pay an unchanged interim dividend of 12 cents a share and restart its share buy back (suspended last year) in the “very near future”, according to CEO Grant Fenn.

Downer reported a 24% slide in first-half net profit to $72.1 million yesterday in what Mr Fenn described as “very challenging” resource markets.

“Commodity prices remain very low with a significant flow on effect on business investment and operating expenditure,” Mr Fenn said yesterday.

The drop in net profit reflected a $13 million write-off of bidding costs after Downer failed to win a contract to build Canberra’s new light rail system, and lower earnings in Downer’s engineering, construction and maintenance business as well as its transport and rail businesses.

But Downer reaffirmed its full year earnings forecast of $180 million, which had been trimmed from $190 million earlier this week to compensate for the failed Canberra light rail contract bidding costs. The original full year guidance was $210 million which was about steady on 2014-15’s full year profit of $210.2 million.

Revenue dipped by 1.2% to $3.54 billion in the half year, while group profit margins fell to 3.2% from 4% a year earlier.

The company says its gearing remains low at just over 8%, with liquidity of $1 billion, including $490 million in cash.

But investors were encouraged by Downer’s mining earnings which rose 13% to $67.7 million, thanks to the solid performance of ongoing contracts and a one-off benefit of $15 million.

Profit margins in the business rose to 8.7% from 7.3% a year earlier, but the sustainability of that improvement remains to be seen given those challenging resource markets and the slide in prices for products such as oil, gas, coal and iron ore.

Like Programmed’s management, Mr Fenn said Downer also had been surprised by the way commodity prices had fallen further than expected.

Mr Fenn said that had forced Downer and its customers into more discussions about doing “more with less” – in other words, repricing contracts at lower levels, or doing more for less.

“Our customers are understandably very focused on costs and we continue to work closely with them,“ Mr Fenn said.

About Glenn Dyer

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.

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