MARKETS SPECTATOR: Downer EDI's overdue upper

Rating agency Fitch has upgraded Downer EDI’s long-term issuer default rating, saying the mining services company has plenty of work in the pipeline.

At last, some good news for Downer EDI whose shares have plunged 39 per cent since their 52-week high of $5.56 on March 7 which came after investors sold mining services shares after profit warnings.

Contract mining, the biggest contributor to Downer’s earnings before interest and tax, has contracts that will keep the company busy for two years even if the company wins no new contracts, says rating agency Fitch who raised the company’s debt rating to BBB.

Companies are likely to re-hire Downer, says Fitch. Project delivery governance has improved. The board of directors has oversight over the delivery of work to particular projects worth more than $250 million. Bidding for projects has to clear internal legal, accounting, treasury and tax examination. This may enable Downer to minimise potential contract losses.  

“Downer’s sector leadership, breadth of services and diversified order book will support its earnings through a weak patch in the Australian economic cycle,” writes Fitch's Johann Kenny.

The mining sector accounts for 32 per cent of Downer’s current work. More than 80 per cent of this work is in iron ore and metallurgical coal. Global steel production will grow at 3.5 per cent a year to 2025, according to the Bureau of Resources and Energy Economics.

Moreover, Fitch estimates Downer’s losses from the Waratah Train project, now 80 per cent complete, will be $430 million. Fitch expects the project to turn cash positive in 2014.

At 1553 AEST Downer’s shares added 1 cent, or 0.3 per cent, to $3.40. The S&P/ASX200 Index was down 17.282, or 0.4 per cent, to 4808.60.