Downer EDI Limited (DOW)
HOLD

Further potholes...

 27 Feb 2023
Sector: Industrials

1H23 RESULT

Need To Know

  • Earnings miss and FY23 NPATA guidance downgraded ~20% below consensus.
  • Result quality poor, low level of cash generation
  • New CEO indicates a major restructuring is underway. Will result in material restructuring costs in 2H FY23. 

Result Highlights

  1. Revenue $6,145m (+2.9% YoY).
  2. Underlying EBITA of A$133.6m (-24% YoY) vs market at ~A$153m. 
  3. Underlying NPATA A$68.0m (-28%) vs market at ~A$77m.
  4. DPS of 5cps in-line with market. 
  5. Operating cashflow of -A$35m (~A$295m in pcp) was well below the market ~A$170m. EBITDA cash conversion was just 9%.
  6. Gearing 2.3x (ND/EBITDA) increased from 2H FY22 due to a A$317m increase in net debt.

Restructuring

New CEO Peter Tompkins (commence Feb 2023) outlined his transformation plan which includes; 1). intention of delivering A$100m pa in benefits from FY25+; 2). selling further assets; 3). exiting higher risk markets; and 4). improving margins.  The restructuring is now underway and will result in material restructuring costs in 2H FY23.  

Investment Thesis

A poor result again from Downer. The miss was attributed to the NZ floods (-A$8m post-tax), Accounting issues (-A$12m post-tax), Water projects losses due to floods (-A$12m post-tax), and impact from slowdown in government minor capital works (-A$8m post-tax).  The later lost contract is somewhat strange given the pipeline of government works. 

Downer has gone through almost continuous downgrades post COVID due to weather, labour, and pandemic related issues. In addition, DOW faced an accounting irregularity which overstated earnings base FY20-22 inclusive. It’s been announced prior to todays result that this was human error around revenue recognitions and not something fraudulent (a modest positive in scheme of things).

Downer continues to trip over its own shoelaces by underperforming expectations. A major restructuring program is long dated and will involve significant one-off charges further hammering cash flow generation. 

With so much earnings unreliability, a base for earnings and valuation is challenging. Our Hold rating premised on the prospects of turnaround and the COVID/weather issues normalising. 

Specific Disclosure: Sandstone Insights analyst holds a position in the subject company.

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Stock Overview

Share Price

Company Overview

DOW is a global facilities management firm that provides road & rail management, power & gas network assets, and outsourced facility services.

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