Markets: Off to a Downer

Mining services, infrastructure and rail company Downer EDI says 2014 profit won't rise, a forecast which is expected to be repeated throughout the sector.

First: the good news for Downer EDI. Stripping out a provision in relation to its work on a Singapore tunnel, the infrastructure, mining services and rail company said its net profit increased 10 per cent to $215.4 million.

Earnings before interest and tax in the company’s infrastructure unit soared a third “despite pressure on bid margins” as the company cut costs. EBIT for mining services, increased, yes increased, if only by 0.4 per cent, as Downer secured a new long-term contract and activity picked up at some of the mines where it is working. The blight among its three divisions was it rail unit. EBIT dropped 23 per cent due to a drop in demand for freight locomotives and the company ending its locomotive manufacturing.

For a company with perhaps unique insight into the heart of the Australian economy, Downer cautions its 2014 financial year will show that net profit will be largely unchanged from 2013 at $215 million. Mining companies continue to reduce their spending on projects with an emphasis on cost cutting. Government budget constraints will mean less spending on road and rail maintenance. “There is a higher level of uncertainty in revenue for the 2014 financial year than in the prior year,” Downer says in an ASX statement. The company said toward the end of its 2013 financial year there were reduced production targets and coal and iron ore mines in Australia where it is working. The odds of the company further cutting its 2014 profit forecast must now be high.

That’s bad news for optimists. Analysts who had been cautiously optimistic that 2014 earnings would be an improvement over 2013 must now deal with the a company forecast that augers badly for the mining services as well as construction and engineering companies. The 2013 earnings season may indeed be painful.

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