Downer on track but tips tougher times down the line
The company expects a flat net profit of around $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¢ to $3.86, the day's low.
Pressure on margins would be offset by the benefits of low interest rates and lower borrowings would reduce interest charges, Mr Fenn said, while continuing cost reduction was 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," Mr Fenn said in a statement. "We are one of the few companies in the sector to deliver on guidance."
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, some contract extensions and some contract variation.
Half of the revenue loss came from the loss of two contracts with Peabody Energy, but with "no profit impact," Mr Fenn said.
Work on hand was steady at around $19 billion, but with a rise of around $1.3 billion in the infrastructure sector which would 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 2015, but with the chance that 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 said.
Adele Ferguson— Page 34
Frequently Asked Questions about this Article…
Downer EDI is guiding to a flat net profit of around $215 million for fiscal 2014, reflecting management's expectation that earnings will be broadly unchanged from the prior year.
Downer says the mining-sector downturn could shave a significant amount off revenue — the article notes estimates of around $600 million and the company later flagged mine services revenue losses of up to $650 million — largely from contract losses and clients cutting costs.
In the year to June, Downer reported a strong recovery: net profit rose to $203.98 million from $107.51 million a year earlier, earnings per share increased to 45.7 cents from 23.7 cents, and revenue climbed to $8.4 billion from $7.9 billion.
Downer declared a final dividend of 11 cents per share, with franking at 7.7 cents per share; management expects franking levels to improve further in the year ahead.
Downer plans to offset margin pressure through lower interest costs from reduced borrowings, continued cost reductions, productivity improvements, and savings such as greater joint procurement, while focusing on execution to manage tighter margins.
Shares gave up early gains and slipped 5 cents to $3.86 by the close of trade, with investors reacting to the prospect of flat earnings and increased revenue uncertainty.
Downer expects $60–65 million in cash to be freed from the Waratah program in fiscal 2014, rising to $150–160 million in 2015. Management said the Waratah contract won’t recover prior losses but will serve as a platform for the company’s future rail business and could boost revenue for the current financial year.
Work on hand was steady at around $19 billion. That figure included about a $1.3 billion rise in infrastructure work, which was offset by declines of roughly $650 million in mine services and $590 million in rail revenues — useful context for investors assessing the company's near‑term revenue mix and contract pipeline.
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