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Downer reduces costs to hit HY targets

by Gavin Madson | Feb 04, 2014

Key points:

  1. Half year NPAT of $99.1m and EBIT of $160.1m sees the company on track
  2. Management confirmed its expectation to deliver on its full year target of $215m NPAT
  3. Revenues down in all three divisions, but focus on costs delivered on the company’s forecasts
  4. Downer (2018 year) senior bonds last traded at BBSW + 183bps

The company announced half year profit after tax of $99.1m for the six months ended 31 December 2013, an increase of 5.4% from the prior comparative period, whilst EBIT was down 5.4% to $160.1m. The result brought the company in line with its forecasts and should allow them to deliver on its full year forecast of NPAT of $215m.

Downer’s ability to meet its target should be seen as a positive for bond holders especially given  the company’s peers failed to deliver their forecasts as the demand for engineering services declined due to slowing mining activity and cuts to government infrastructure projects. Other positives coming out of the results included:

  • Low level of gearing being maintained by the company (improved gearing and coverage from the same period last year)
  • Significant levels of liquidity with $1.0bn (of cash $364m and $647m of undrawn facilities) available to the company
  • Increase in work-in-hand (up to $19.6bn from $19.0bn)
  • News that the last train in the Waratah project has departed China (this will be the 78th and last train to be presented to Transport for NSW due the second half of the financial year).

The NPAT was boosted by a number of one offs (which effected the previous periods’ result which did not affect the current period), however a focus on cost containment, including cutting staff numbers, helped the company achieve its targets.

The negative from the results was the drop in revenues across all three divisions. Infrastructure revenues were down 18% as mining related capital works (particularly in Western Australia) dried up, however early action on costs allowed the division to deliver on its profit targets. Revenues for the Mining division were down 23% in line with the significant slowing of activity in this sector over the last 12 months; however the company was able to offset the lower revenue by improvements in productivity, lower sub-contracting volumes and equipment hire volumes. Importantly, the division was able to win an increased share of new contracts (admittedly from a smaller pool) over the period. Finally, the Rail division saw revenues drop 19%, in part due to the rolling off of the Waratah rail contract, however a reduction in head count helped offset some of this drop.

Corporate costs were reduced $42m to $22m for the half (which is part of the reason NPAT is up but EBIT is down) and the company announced a half year dividend of 11cps – up from 10cps at the prior half year.

Downer has continued to deliver solid results through tough times for the sector.  In part helped by its diversified revenue streams but also due to the focus management placed on cost control prior the start of this current sector downturn. Downer offers one of the strongest returns for an investment grade issuer due to a hangover of previous issues.

Downer (2018 year) senior bonds last traded at BBSW + 183bps.

The bonds, while closely held, offer a good opportunity to diversify your portfolio, should they become available.

For more information please conract your local dealer.