'Slow' - Corporate works ahead

RESULTS ANALYSIS

Need To Know

• Earnings begin to improve after a poor 1H23.
• New management team charged with lifting performance.
• No FY24 guidance and soft outlook commentary leaves our recommendation at Hold.

Investment Implications

Downer has dug itself out of a big hole in 1H23 to exit the year with a modicum of momentum. But the lollipop sign still says ‘slow’ with respect to the earnings outlook. The new management team is targeting a modest operating margin of 4.5% by FY25 and there are plenty of legacy contracts still hanging on to retard progress. Downer’s new corporate purpose is to ‘enable communities to thrive’. Perhaps it should get its own business humming first.   

FY23 result. Revenue increased 5.4% to $12.6bn and underlying EBITA reached $323m (consensus $327m) boosted by a good 2H23 contribution ($200m). It could have been better if not for more poor performance in the Utilities segment which reported another loss as problems festered. The Transport business was the standout as EBITA hit $289m with $200m of that racked up in 2H23. The Facilities segment dragged on the result with a disappointing 2H23 outcome, possibly due to a smaller pipeline of work.

DOW declared a final dividend of 8cps (full year 13cps) unfranked.

Outlook. DOW said its improvement in 2H23 is continuing into FY24. The company is working towards an EBITA margin of at least 4.5% by FY25 which indicates the narrow pathway ahead with little room for further error. CEO Peter Tompkins has been in charge since February 2023 and has reset his management team and established a new operating model.

No FY24 guidance has been given so we anticipate an update at the November 2023 AGM. For now, consensus forecasts show FY24 net profit at $222m (FY23 $174m), but despite the optimism emanating from the company, we have low confidence in what lies ahead. The company needs to shake off the legacy contracts that plague existing work, and perhaps hope for a better run of weather.  

Investment View

The market may be underwhelmed by the outlook commentary which is steering towards a 2H24 skew in earnings. It will take a big effort from a new management team to reset the operating tone of the business before earnings can respond. After a long trot of bad weather, labour shortages, an accounting error that overstated earnings across FY20-22 and miscellaneous pandemic issues, DOW could do with a period of stability. Investors may find a detour is a better option.