Digging behind the headline numbers reveals Downer’s interim result was a brave effort considering the obstacles encountered. Omicron-related staff absenteeism was a major impediment and leaves DOW cautious about its full year performance. On the other hand, underlying divisional earnings performance and cashflow was commendably ahead of last year, allowing the Board to increase the dividend.
Core EBITA of $238 million in 1H22 was 4.4% ahead of the same period last year while non-core hospitality, mining (now discontinued) and higher corporate expenses dragged the headline result down 10.5% to $181.6 million.
CEO Grant Fenn said it had been impossible to ignore the impact COVID had on operations during the half, particularly the Omicron variant. The latter caused some business units to cope with up to 40% of staff absent at times. DOW has worn this on the chin and views it as temporary after seeing some improvement in recent weeks. Fortunately, this has had a limited impact on the group’s ability to service customers. DOW also has flexibility to adjust prices to offset cost escalation across the majority of its contracts.
Operating cashflow of $270.4 million was a pleasant surprise compared to consensus expectation of around $241 million. Higher EBITDA cash conversions and a 23% reduction in capex on the back of asset sales helped the cause. Net debt fell to $582.5 million bringing gearing down to 1.5x net debt to EBITDA, down from 2.1x a year ago and well below the 2.0-2.5x target range. This outcome encouraged the Board to bump up the interim dividend to 12cps (unfranked).
Investment view
No specific guidance was provided for FY22 although this was quite understandable given the uncertainty created by Omicron. Consensus forecasts have wilted in recent months although we wonder if this allows for a likely much better 2H22 which is typically seasonally stronger and should be less affected by Omicron or bad weather.
We note that Deloitte Access Economics forecasts public infrastructure spending to increase by more than 50% between now and 2023 to more than $300 billion. DOW will be a key beneficiary.
DOW is partway $12 million) through it $400 million buyback with a balance sheet in good order and is trading at just 12x FY23f EPSA. The dividend yield of around 5% adds further appeal.
Risks to investment view
Earnings would be dented if the economic infrastructure plan did not play out, or if COVID impacts continued to disrupt operations. We rate these risks as relatively low probability.
Recommendation
We have retained our Buy recommendation.
