Downer EDI flags tougher year ahead

The prospect of flat earnings for the year ahead by Downer EDI weighed on its shares, with the group to continue to suffer from the downturn in mining sector activity that could wipe an estimated $600 million off revenue.

The company expects a flat net profit of about $215 million for fiscal 2014, chief executive Grant Fenn told analysts on Tuesday.

As a result, early share price gains were eroded by the close of trade, with Downer EDI shares slipping 5¢ at $3.86, the day's low.

Pressure on margins will be offset by the benefits of low interest rates and lower borrowings will reduce interest charges, Mr Fenn said ongoing cost reduction is expected from further efforts to boost productivity, along with savings in other areas such as greater joint procurement.

In the year to June, Downer EDI's net profit surged to $203.98 million from $107.51 million a year earlier, with earnings a share rising to 45.7¢ from 23.7¢.

The strong recovery was booked on revenue of $8.4 billion, up from $7.9 billion.

The final dividend is 11¢ a share, franked to 7.7¢, with franking set to improve further in the year ahead.

"This result is a great outcome in the current environment. We are one of the few companies in the sector to deliver on guidance," Mr Fenn said in a statement.

But fiscal 2014 would be more challenging, partly due to the mining sector downturn.

"As a result, there is a higher level of uncertainty in revenue for the 2014 financial year than in the prior year," Mr Fenn said.

Downer has flagged revenue losses of as much as $650 million in its mine services division in the year ahead, reflecting contract losses coupled with clients moving aggressively to cut costs.

The bottom-line impact of the heavy loss of revenue in this division would be largely mitigated, thanks to some cost reductions internally, contract extensions and contract variation.

Half the revenue loss came from the loss of two contracts with Peabody Energy, but with "no profit impact", Mr Fenn said.

Work on hand is steady at around $19 billion, but with a rise of around $1.3 billion in the infrastructure sector which will be offset by a decline of around $650 million in mine service revenue and $590 million in rail sector revenues, he said.

"It is competitive," he said of the business outlook. "We do see margins a little tighter, with the focus on execution" to help offset this pressure. "We're not gloomy."

The company expects a high level of cash to be freed from the Waratah train construction program, estimating $60-65 million in cash in fiscal 2014, rising to $150-160 million in fiscal 2015, but with the chance that the anticipated revenue for this financial year will be boosted.

"We won't recover the losses [on the Waratah contract] but it will be a platform for our future railway business," Mr Fenn told analysts.

Adele Ferguson— Page 40