Wednesday 06 August 2014 by Legacy

Downer EDI Limited research report August 2014 - Retail

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 in excess of $1bn provided by a significant cash balance and undrawn facilities
  • 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 mining 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 $17.6bn work-in-hand
  • For the year ended 30 June 2014, Downer EDI has reported a 15.3% decrease in total revenue to $7.7bn, a 4.9% decrease in earnings before interest and tax to $341.1m and a 5.9% increase in net profit after tax to $216.0m
  • Downer’s net debt (gross debt less available cash) was reduced from $202.3 million at 30 June 2013 to a net cash position of $8.5 million at 30 June 2014. After including derivatives and deferred finance charges, this results in a net debt position of $32.7 million at 30 June 2014, resulting in an 86.3% reduction in on-balance sheet gearing to 1.6%
  • 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 the infrastructure and rail sectors remains solid (though off its peak) with Downer’s forward order book and long history providing investors comfort