Downer EDI Shares Dive On Profit Warning

By Glenn Dyer | More Articles by Glenn Dyer

Shares in Downer EDI joined the downgrade crunch club yesterday after directors slashed 2019-20 earnings forecasts by around 12%.

Downer shares slumped 26% at one stage in early trading yesterday in the wake of the downgrade for the June 2020 financial year.

The share price ended off 21% at $6.915.

The integrated services group now expects its net profit in the 2019-20 year to be $300 million.

This compares to its previous guidance of $365 million, meaning a forecast fall of 12% year on year. That was to be a rise of around 7% from 2018-19.

Pre-tax the cut to earnings will be around $90 million.

Now it’s an effective 19% cut to earnings for the year (we will know when the interim results are issued next month) and directors blamed underperformance of its Engineering, Construction, and Maintenance business for the downgrade.

The main drag on its profits is project underperformance in the Engineering, Construction, and Maintenance (EC&M) business where the hit is estimated at $43 million pre-tax.

Downer said this followed that the completion of a small number of loss-making construction contracts where the costs incurred during December and January materially exceeded its estimates.

CEO Grant Fenn said: “We have increased the forecast net costs to complete these projects by $43 million and these costs will be reflected in Downer’s results for the first half of the 2020 financial year.”

“We are particularly disappointed with the deterioration of these projects at such a late stage of their delivery. We do not expect any further increase in costs above our revised estimate,” he added.

Also weighing on its profits was lower revenue in the construction side of the EC&M business.

Based on current win rates and expected delays in project awards in the resources-based construction market, forecast construction revenue has reduced by approximately $300 million and forecast earnings by approximately $20 million.

In light of this underperformance, Downer says it now plans to reposition its EC&M construction effort to markets and projects where it has competitive strength and the opportunity to drive related long-term service-based contracts.

That has seen it provide $10 million for one-off restructuring costs to reflect the net impact of staff redundancies.

However, it expects this change of focus to ultimately result in significantly improved earnings through better project performance, substantial cost reductions, and less volatility.

A delay to the start of two contracts in the contract mining division will cost $12 million or thereabouts pre-tax.

Downer also confirmed that cash flow will be weaker than previously forecast at the AGM in late 2019 (when it was first downgraded). But the company said it had ample financial resources.

“Downer has significant available liquidity of $1.65 billion made up of cash of $515 million and committed undrawn facilities of $1.14 billion as at 31 December 2019,” directors said in Thursday’s statement.

Glenn Dyer

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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