Downer EDI Limited Analysis

Overview

Downer is a leading provider of services to customers in markets including transport services, technology and communications services, utilities services, engineering, construction and maintenance, mining and rail. Downer operates primarily in Australia and New Zealand but also in the Asia-Pacific region, South America and Southern Africa.

In March 2017 the company had signed an agreement to acquire the construction, infrastructure and project management businesses of Hawkins.

Performance

The following information was extracted from Downer EDI Limited's full year report, released 30 August, 2024:

Financial overview for the 12 months ended 30 June 2024

Pro forma Revenue of $11.7 billion increased by 5.5% and work-in-hand of $38.5 billion remains robust with an increase of 1.0% over the prior period. Our immediate focus remains on maintaining discipline in applying our enhanced risk guardrails and lifting the quality of new revenue onboarded.

Pro forma EBITA of $384.1 million, which excludes divestments and individually significant items, increased 34.1% or 17.7% on an underlying basis, and pro forma EBITA margin increased to 3.3% in FY24 and to 4.0% in the second half, the latter representing a 1.0% uplift on 2H23.

Our Utilities business continued its turnaround to profitability with pro forma EBITA of $54.5 million (FY23: $10.7 million loss) driven by a strong performance in Telecommunications, the progressive completion of low margin contracts, settlement of contractual claims, the commercial reset of a loss-making power maintenance contract and the achievement of overhead cost reductions.

The Facilities business had a positive result in FY24 with pro forma EBITA of $179.3 million, an increase of 3.3% with good contributions from the Defence, Health & Education, Government and Industrial and Energy lines of business, and an overhead cost reduction program. The portfolio was also simplified during the year with the divestment of a number of non-core businesses.

Our Transport business also had a positive result, with pro forma EBITA up 5.0% to $252.8 million. This was led by a turnaround in the New Zealand Road Services and Projects businesses, together with increased contribution from Rail & Transit Systems (primarily through the Queensland Train Manufacturing Program mobilisation). The business implemented a range of profit improvement initiatives in 4Q24 including the commercial reset of low margin and loss-making contracts and further overhead cost reduction programs. This was partially offset by reduced road maintenance spending by customers in Australia, particularly in Victoria, settled train refurbishment claims in 1H24 and a lower contribution from the Keolis Downer joint venture.

Underlying NPATA increased by 20.6% to $210.1 million. The difference between underlying NPAT of $193.9 million and Statutory NPAT of $82.1 million relates to individually significant items (ISI) of $111.8m after tax.

On a pre-tax basis, the ISI of $177.2 million primarily comprises $61.6 million in transformation implementation and restructuring costs and $117.7 million of impairments and other asset write downs ($56.0 million relating to three Australian asphalt plant impairments and $11.2 million relating to accelerated amortisation of IT assets, $50.5 million relating to impairment of discontinued software projects and other costs resulting from the Downer IT transformation and cost reduction program).

Operating cash flow increased by 71% to $544.1 million as a result of Downer’s improved focus on working capital management, cash collection and resolution of contractual variations and claims. This resulted in normalised cash conversion to 104% for the period, a significant improvement on 63% in FY23.

Net debt to EBITDA has improved to 1.4x from 2.0x at 30 June 2023, representing further strengthening of the balance sheet. This improvement was driven by the receipt of divestment proceeds and stronger earnings and operating cash flow.