Downer EDI reports FY14

Key points

1. Downer EDI (Downer) has reported FY14 net profits in line with expectations. Net profit after tax increased 5.9% to $216.0m and earnings before interest and tax decreased by 4.9% to $341.1m. Total revenue decreased by 15.3%, or $1.4bn, to $7.7bn, including $0.4bn of contributions from joint ventures.
2. Downer’s infrastructure division revenue decreased by 9.5%, or $500.6m, to $4.7bn. This was due to the decline in mining based capital expenditure, particularly in Western Australia, a highly competitive tendering environment and challenging conditions for the consulting businesses.
3. Downer’s mining division revenue decreased by 22.3%, or $569.0m, to $2.0bn due to the completion of coal mining contracts in March 2013 and the reduction in scope at other mines. In addition, resource owners continued to reduce ancillary works in an attempt to mitigate the financial effects of falling commodity prices.
4. The net assets of Downer increased by 7.4% to $2.0bn. This increase was substantially reflected in net non-current assets which increased by $192.3m reflecting the Group’s continued focus on cash conversion and the pay down of debt.
5. In April 2014, Downer extended its $400m Syndicated Credit Facility for a further year to April 2018. The facility was completed with a 23% reduction in the credit margin and a 30% reduction in the commitment fee payable on any undrawn balance. This facility also contains a one year extension option permitting Downer to potentially further extend the duration to April 2019. Downer also refinanced its bilateral bank facilities during the year and took the opportunity to build further tenor into these facilities from 12 months to periods of up to 24 months. Having successfully refinanced or extended its debt facilities during the year, Downer believes it has sufficient debt (including bond) headroom available given the challenging economic environment expected in the 2015 financial year.

Downer’s operating performance in FY14 and forecast lower profits for 2015 reflect the very challenging state in the mining markets. The company’s FY14 results were in line with performance and it has announced a share buy-back to be implemented over the course of 2014-15. Downer said it was targeting net profits after tax of about $205m for fiscal 2015 after reporting net profits in the year ended June 30 2014 rose 6% to $216m, slightly higher than its guidance of $215m.

In a statement to the ASX, Downer has indicated resources based spending in 2015 is expected to be flat, or declining, on current low levels, and underlying mining commodity markets are currently very difficult for a number of its major customers.

Notwithstanding the challenges associated with Downer’s exposure to the mining sector, its investment grade credit profile is considered to be unaffected by the rating agencies as the company moves into net cash position by FY15. This will provide Downer with financial flexibility as it transitions the business away from resources to civil construction and maintenance services sectors.

The Downer Group Finance Pty Ltd bond, maturing in November 2018, is currently trading at yields below 5.00%p.a. which represents fair value. Please speak to your FIIG representative if you are interested in trading in the Downer bonds.

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.

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