Shares fall amid confusion over Downer's denial

SHARES in Downer EDI fell to a near record low of $3.74 yesterday after leaked emails from a senior manager showed one of its divisions was trying to massage its end-of-year accounts to meet targets.

By InvestSMART · 30 Jun 2010

By InvestSMART ·
30 Jun 2010

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SHARES in Downer EDI fell to a near record low of $3.74 yesterday after leaked emails from a senior manager showed one of its divisions was trying to massage its end-of-year accounts to meet targets.

BusinessDay reported yesterday that the construction and engineering group's works division had put out a directive to stop paying up to $35 million to suppliers this month to meet end-of-year cash targets.

Downer initially denied the report in a statement released to the stock exchange at 10am yesterday.

By 11am it had released an "additional clarification" after BusinessDay posted the leaked emails online.

It said that cash management in its works division included "a proposal to manage creditor payments". "The relevant debtors are expected to be received before year's end and Works Australia expects to pay all creditors as per agreed creditor terms," the company said.

This triggered investor confusion. One shareholder said: "I hope you can get some sense out of Downer because their statements to the ASX are very confusing. In fact, I do not believe any respectable accountant would issue such gobbledegook."

The news could not come at a worse time for Downer, which earlier this month was forced to write down $260 million in assets, and is battling credibility issues over an $8 billion contract for Sydney's next generation of trains. Downer is leading the Reliance Rail consortium that won the tender three years ago.

A Commonwealth Bank analyst, Ben Brownette, who has a sell recommendation on the stock, said in a note to clients yesterday that the situation arose from a failure to achieve targets and execute work appropriately, leading to a high value of disputed amounts that had not been dealt with in a timely manner.

Mr Brownette said given operating cash flow after maintenance capital expenditure and after dividends was negative, $35 million is substantial.

"We would imagine that Downer would likely have had a significant amount of time to digest this information. Therefore, in our view, the handling of issues today is unacceptable," he said.

Goldman Sachs JBWere issued a report that Downer faced several risks, including the potential for more cost blowouts on the Reliance Rail contract and the possible need to raise more equity.

In a statement last night, the Australian Securities and Investments Commission and the Australian Securities Exchange said they would monitor mutual fund and portfolio managers who improve the value of their holdings with "window dressing".

Downer's shares closed 6.3 per cent lower yesterday at $3.74.

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Frequently Asked Questions about this Article…

Why did Downer shares fall to a near-record low?

Downer shares fell after leaked emails showed its works division was allegedly trying to manage end-of-year accounts and suggested stopping payments to suppliers to hit cash targets. The leak, initial denial and then a later clarification triggered investor confusion and selling, with shares closing 6.3% lower at $3.74.

What did the leaked emails say about Downer’s cash management and supplier payments?

The BusinessDay-published leaked emails reportedly showed a directive in the works division to stop paying up to $35 million to suppliers this month to meet end-of-year cash targets. Downer later described the measure as a "proposal to manage creditor payments" and said debtors were expected before year’s end and creditors would be paid as agreed.

How did Downer respond to the BusinessDay report and leaked emails?

Downer initially denied the BusinessDay report in an ASX statement, then issued an "additional clarification" after the leaked emails were posted online. In the clarification the company said the works division’s cash management included a proposal to manage creditor payments and that expected receivables should allow it to pay creditors as per agreed terms.

How significant is the $35 million figure mentioned in the reports for investors?

Analysts noted $35 million is substantial because operating cash flow after maintenance capital expenditure and after dividends was negative. Commonwealth Bank analyst Ben Brownette flagged the amount as material and said the way the information was handled was unacceptable to investors.

What other financial problems has Downer recently faced?

Earlier in the month Downer was forced to write down $260 million in assets and is facing credibility issues on an $8 billion contract to supply the next generation of trains for Sydney as lead of the Reliance Rail consortium.

What did analysts and brokers say about Downer’s risks after the leak?

Commonwealth Bank analyst Ben Brownette, who has a sell recommendation, said the situation stemmed from failing to achieve targets and timely resolve disputed amounts. A report to clients from Goldman Sachs JBWere warned of several risks, including potential for more cost blowouts on the Reliance Rail contract and a possible need to raise additional equity.

Are regulators involved or monitoring the situation?

Yes. The Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange (ASX) said they would monitor mutual fund and portfolio managers who try to improve the value of holdings through "window dressing" in light of the events.

What should everyday investors watch next regarding Downer shares?

Everyday investors should monitor further ASX announcements and corporate updates from Downer, watch analyst reports and any news about creditor payments, receivables timing or cost blowouts on the Reliance Rail contract, as these factors are driving share volatility and confidence.