Key Points
- Downer reported a total revenue amount of $3.6bn down by 8.8% from the prior period
- Downer’s EBITDA has decreased by 11.5% to $263.7m
- Its 1H15 net profit was down by 4.4% to $94.7m
- Net debt of $252.7m up from $32.7m at 30 June 2014 following the acquisition of operations and maintenance services business Tenix
- Downer's gearing was up to 11.2% (17.4% if once off balance sheet debt is included) with available liquidity of approximately $1bn, comprising of $378m cash and $612m of undrawn committed facilities
- Adjusted net debt or EBITDAR up from 2.0x to 1.8x at 30 June 2014
- Interest cover ratio up to 9.7x from 7.9x at 30 June 2014
Commentary
Downer’s performance reflects the challenging conditions facing the mining-related services sector. All key financial measures are down in 1H14, and mining based construction and services markets remain subdued. Downer has affirmed its NPAT guidance of $210m for FY15 based on current trading versus an NPAT of $216m in FY14. The company has insisted it will meet its full year target but says it will focus on reducing costs.
Offsetting the challenges in the infrastructure and mining businesses, Downer’s business prospects for in the railway sector are looking positive. Downer announced yesterday a 10 year, $1bn deal with Pacific National to service its 300 plus fleet of locomotives. This is a positive step, and the company has other prospects in this industry that it can pursue.
Downer’s debt levels have increased following the acquisition of Tenix in October 2014. Tenix is a leading provider of long term operations and maintenance services across the utilities, waste industrial, and resources sectors. Downer intends to refinance the $300m Tenix acquisition bridge loan through a AMTN or USPP bond issuance. The acquisition of Tenix provides Downer a foothold into utilities and diversification.
The equity market has been disappointed with the 1H15 performance, with the share price trading down 6% on early morning trading.
From a credit perspective, we remain comfortable with Downer. Despite the weaker performance against 1H14, the 1H15 result was still reasonably solid in a challenging market and the company has reaffirmed its full year profit target of $210m. In addition, Downer’s credit metrics remain robust. Gearing (including off balance sheet debt) is at a conservative level of 17.4%, while the earnings based credit metrics have also held up well. Operating cash flow remained strong at $257.9m with cash conversion of 103.5% of EBITDA.