Company Reports

No-moat urban services company Downer reported a strong fiscal 2024 result and added to it with a bullish outlook statement. This is a far cry from the company of just 18 months ago, weathering market ire over accounting irregularities and weather disruptions, along with a plunge in earnings. The company declared a final AUD 11 cent dividend, bringing the fiscal 2024 total up 31% to a better-than-anticipated AUD 17 cents—an as-expected 68% payout ratio but on the higher earnings.

Downer is a major domestic infrastructure, rail, engineering, and maintenance business. The company is chiefly exposed to the domestic rail, water, road, and telecommunications sectors. The future of Downer is focused on urban services, with mining and high-risk construction businesses sold down. Downer does not have a moat despite position, scale, and strong customer relationships. Contracting is a difficult industry in which to establish a moat, and Downer in the past decade underperformed from an operational and financial perspective as a result of miscalculating contract risk, poor project management, and unsatisfactory project execution.

No-moat urban services company Downer has reported a combined AUD 1.1 billion in new contracts in the last two months, bolstering a relatively relatively lean year.

Downer is a major domestic infrastructure, rail, engineering, and maintenance business. The company is chiefly exposed to the domestic rail, water, road, and telecommunications sectors. The future of Downer is focused on urban services, with mining and high-risk construction businesses sold down. Downer does not have a moat despite position, scale, and strong customer relationships. Contracting is a difficult industry in which to establish a moat, and Downer in the past decade underperformed from an operational and financial perspective as a result of miscalculating contract risk, poor project management, and unsatisfactory project execution.

We retain our AUD 5.60 fair value estimate for no-moat Downer EDI. Underlying first-half fiscal 2024 net profit after tax for the restyled urban services company increased 16% to AUD 68 million. While this was below our expectations, we see no cause to change our midcycle estimates. Downer is clearly demonstrating progress on addressing underperforming businesses, and fiscal 2024 was always going to be a transition year adding uncertainty to near-term earnings.

Downer is a major domestic infrastructure, rail, engineering, and maintenance business. The company is chiefly exposed to the domestic rail, water, road, and telecommunications sectors. The future of Downer is focused on urban services, with mining and high-risk construction businesses sold down. Downer does not have a moat despite position, scale, and strong customer relationships. Contracting is a difficult industry in which to establish a moat, and Downer in the past decade underperformed from an operational and financial perspective as a result of miscalculating contract risk, poor project management, and unsatisfactory project execution.

Downer is a major domestic infrastructure, rail, engineering, and maintenance business. The company is chiefly exposed to the domestic rail, water, road, and telecommunications sectors. The future of Downer is focused on urban services, with mining and high-risk construction businesses sold down. Downer does not have a moat despite position, scale, and strong customer relationships. Contracting is a difficult industry in which to establish a moat and Downer in the past decade underperformed from an operational and financial perspective as a result of miscalculating contract risk, poor project management, and unsatisfactory project execution.

We retain our AUD 5.60 fair value estimate for no-moat Downer. The company’s shares remain materially undervalued, in 4-star territory. Ongoing contract awards and continued earnings improvement from the disastrous first-half fiscal 2023 are likely key catalysts for share price recovery.

Downer is a major domestic infrastructure, rail, engineering, and maintenance business that undertakes contracted mining services. The company is chiefly exposed to the domestic mining, energy, rail, water, road, and telecommunications sectors. But the future of Downer is focused on urban services, and mining and high-risk construction businesses are being sold down. Downer does not have a moat despite position, scale, and strong customer relationships. Contracting is a difficult industry in which to establish a moat and Downer in the past decade underperformed from an operational and financial perspective as a result of miscalculating contract risk, poor project management, and unsatisfactory project execution.

Downer is a major domestic infrastructure, rail, engineering, and maintenance business that undertakes contracted mining services. The company is chiefly exposed to the domestic mining, energy, rail, water, road, and telecommunications sectors. But the future of Downer is focused on urban services, and mining and high-risk construction businesses are being sold down. Downer does not have a moat despite position, scale, and strong customer relationships. Contracting is a difficult industry in which to establish a moat and Downer in the past decade underperformed from an operational and financial perspective as a result of miscalculating contract risk, poor project management, and unsatisfactory project execution.

We make no change to our AUD 6.00 fair value estimate for no-moat Downer. The morphing urban services company has undertaken more noncore asset sales leading to 6.4% and 10.1% reductions in our fiscal 2021 and fiscal 2022 EPS forecasts to AUD 30.6 cents and AUD 40.0 cents, respectively. But the fair value impact of the earnings declines is countered by boosted cash levels from the asset sales. It should be noted the company still provides no earnings guidance for fiscal 2021 given uncertainty around coronavirus.

We make no change to our AUD 6.00 fair value estimate for no-moat Downer. The morphing urban services company reported a 9% increase in underlying first-half fiscal 2021 NPAT to AUD 94 million, considerably below our expectations. Lower than anticipated revenue across all segments bar transport reflects challenging market conditions with impacts from COVID-19. Transport, however, enjoyed strong operating performance in surfacing, bituminous products, and network maintenance, with an expanded South Australian road network management contract. Utilities revenue faded following roll-off of NBN and UFB construction contracts, while facilities revenue trod water with State Government contracts benefiting from COVID-19 response.

Downer is a major domestic infrastructure, rail, engineering, and maintenance business that undertakes contracted mining services. The company is chiefly exposed to the domestic mining, energy, rail, water, road, and telecommunications sectors. But the future of Downer is focused on urban services, and mining and high-risk construction businesses are being sold down. Downer does not have a moat despite position, scale, and strong customer relationships. Contracting is a difficult industry in which to establish a moat and Downer in the past decade underperformed from an operational and financial perspective as a result of miscalculating contract risk, poor project management, and unsatisfactory project execution.

Downer is a major domestic infrastructure, rail, engineering, and maintenance business that undertakes contracted mining services. The company is chiefly exposed to the domestic mining, energy, rail, water, road, and telecommunications sectors. But the future of Downer is focused on urban services, and mining and high-risk construction businesses are being sold down. Downer does not have a moat despite position, scale, and strong customer relationships. Contracting is a difficult industry in which to establish a moat and Downer in the past decade underperformed from an operational and financial perspective as a result of miscalculating contract risk, poor project management, and unsatisfactory project execution.

Downer is a major domestic infrastructure, rail, engineering, and maintenance business that undertakes contracted mining services. The company is chiefly exposed to the domestic mining, energy, rail, water, road, and telecommunications sectors. But Downer’s strategy is to refocus itself as an urban services business with a stronger platform for long-term, sustainable growth. Mining and high-risk construction businesses are being sold down.

In early February, Downer management reaffirmed the company was on track to achieve fiscal 2015 net profit after tax, or NPAT, of "about AUD 210 million". However, in the past two months, Downer has been awarded a major contract by Fortescue Metals Group, and announced the Kelois Downer joint venture will acquire Australian Transit Enterprises, or ATE, for AUD 163 million. Downer's new mining service contract with Fortescue commences in April, runs until the end of September 2016, and is valued at AUD 720 million. The acquisition of ATE, which is a bus charter business, with a fleet of more than 900 vehicles and long-term state government contracts, is scheduled to be completed in April. Despite the recent contract win and acquisition, we remain slightly less optimistic than Downer on fiscal 2015 earnings and are forecasting NPAT of AUD 206 million, on lower demand from the resource sector and pricing pressure from infrastructure customers.