Monday 25 November 2013 by FIIG Research Legacy

Downer EDI Limited research report 2013

Executive Summary

  • Downer EDI Limited (Downer) is an ASX listed engineering and services firm providing engineering solutions across a number of sectors to clients throughout the Asia-Pacific region
  • Downer’s financial profile is relatively strong with a well dispersed maturity profile of its debt obligations, low gearing, a diverse source of funding and strong short term liquidity provided by a significant cash balance
  • An upgrade to the company’s credit rating in the last year was supported by the strengthening of the financial profile of the business over the last two years
  • Whilst the company remains well positioned to continue to enjoy the benefits of spending on significant mining, gas and infrastructure spending over coming years, management have highlighted headwinds facing the engineering sector as the strong Australian dollar, high wages and other forces slow the construction boom of recent years. We however view this as more an issue for the equity of the company than the debt holders
  • Downer maintains a strong, diversified and consistent ‘work-in-hand’ balance and strong contract pipeline provide some comfort over the medium term outlook for Downer’s revenues. At year end Downer held $19bn work-in-hand.
  • The results for the year to 30 June 2013 continued to improve with revenues increasing 7.1% over the previous year, with underlying EBIT up 10.3%.
  • Following significant write-downs in previous years, Downer has undertaken a substantial review of its risk management processes, one of the key outcomes of which, has been an increased concentration of ‘schedule or rates’ contracting, which is borne out in existing work-in-hand contracts.
  • Whilst the sector faces headwinds as major projects are completed, input costs remain high and governments seek to improve balance sheets (delaying infrastructure spending) the overall outlook for infrastructure, rail and mining sectors remains solid (though off its peak) with Downer’s forward order book and long history providing investors comfort