Downer EDI (ASX:DOW)

Grant Fenn
MD & CEO
Market Cap (AUD): 4.08B
Sector: Industrials
Last Trade (AUD): 6.87 +0.01 (+0.15%)
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1. About

Downer designs, build and sustains assets, infrastructure and facilities and it is the leading provider of integrated services in Australia and New Zealand. With a history dating back over 150 years, Downer is listed on the Australian Securities Exchange and New Zealand Stock Exchange as Downer EDI Limited. The Company also owns 88 percent of Spotless Group Holdings Limited. Downer Group employs approximately 56,000 people across more than 300 sites, primarily in Australia and New Zealand but also in the Asia-Pacific region, South America and Southern Africa.

2. Business model

 

The Company operates the following divisions:[1]

 

Division

Revenue ($’M)

% of Revenue

% of Profit (before Int. and Tax)

Profit drivers[2]

Transport Services

$2,743.2  

22.8%

        69.6%

Transport EBITA increased by 14.4% to $142.9 M due to continued strong performance across Australia and New Zealand and good progress on infrastructure projects in Australia

Utilities

$1,783.0  

14.8%

         45.3%

Utilities EBITA increased by 12.7% to $94.8 M, driven by the strong performance from nbn™ contracts in Australia, as well as full year contributions from the acquisitions of UrbanGrid and ITS PipeTech

Spotless

3,093.7

25.7%

76.5%

Spotless’ underlying EBITA contribution was $167.7 M mainly driven by Government related contracts and PPPs

Rail

$732.0

6.1%

19.1%

Rail EBITA increased by 29.4% to $39.2 M, reflecting profit contributions from the SGT and HCMT projects (which made immaterial contributions in the prior period)

EC&M

$2,382.9

19.8%

32.0%

EC&M EBITA increased by 34.2% to $70.6 M due to 12 months’ contribution from Hawkins in New Zealand and the acquisitions of AGIS and Envista. There were strong performances on Australian gas projects and by the Operations Maintenance and Services business. The Mineral Technologies business increased revenue and returned to profitability during the year

Mining

$1,309.4

10.9%

24.6%

Mining EBITA decreased by $33.0 million to $50.4 M predominantly due to the completion of contracts at Christmas Creek and Boggabri

Unallocated

($13.3)

(0.1%)

(167.1%)

N/A

3. Strategy

 

Key strategies include:[3]

 

Maintain focus on Zero Harm

Downer recognises that a sustainable and embedded Zero Harm culture is fundamental to the Company’s future success. Zero Harm means working in an environment that supports the health and safety of its people, allows it to deliver its business activities in an environmentally sustainable manner, and advances the communities in which it operates. This requires a strong commitment to Downer’s Zero Harm objectives from all levels of the business. Downer’s Zero Harm culture is built on leading and inspiring managing risk, rethinking processes, applying lessons learned, and adopting and adapting practices that aim to achieve zero work-related injuries and minimise environmental harm.

 

Improve value and service for customers and their customers

Providing valuable and reliable products and services to Downer’s customers, and their customers are at the very heart of Downer’s culture. It enables Downer’s customers to focus more on their core expertise while Downer delivers non-core operational services. Through ongoing analysis of markets, customers and competitors, Downer is well positioned to improve value and service for its customers and their customers.

 

Improve asset management and data analytics utilisation across the Group

The ISO 55001 standard sets a new baseline for professional asset management across most of the markets in which Downer operates. As a leader in asset management, Downer aims to adopt and implement world leading solutions and insights to benefit its customers and their customers. Additionally, the proliferation of data points and connected devices allows for greater data and business intelligence to be captured and monitored. This is key to driving greater levels of efficiency as well as service improvements.  

 

Position for greater government outsourcing

Following the acquisition of Spotless, Downer is the largest and most diverse services contractor in the Asia-Pacific region with over $12 billion in annual revenues. This scale and breadth give Downer greater resilience to withstand economic headwinds when they arise, and the opportunity to provide a more diverse range of services. Downer is well positioned to pursue government outsourcing opportunities in the Australian and New Zealand markets now and into the future.

 

Leverage opportunities that will emerge from greater urbanisation in major cities

As cities become larger and more complex, opportunities will emerge for Downer in connecting, managing and monitoring their core infrastructure. This will include transport infrastructure, public transport, utilities, telecommunications, and other technology platforms. Downer is well positioned to work with governments and citizens to understand and shape the infrastructure and networks that will underpin the megacities of the future.

 

Orient Downer’s portfolio to growth markets

Downer continues to enjoy wide-reaching access to substantial asset management, projects, and services opportunities in its core geographies of Australia and New Zealand. While these geographies will remain the core focus for the foreseeable future, Downer continues to investigate and pursue identified and evaluated opportunities in Southern Africa, South America, North America, Europe, and Asia.

 

Embed operational technology into core service offerings

Downer is focused on increasing the utilisation of operational technology across all its service lines to improve differentiation and competitive advantage. This includes investing in partnerships with global technology experts, co-creating bespoke products and services to meet customer needs, and investigating selective M&A opportunities to improve the quality of the Group’s service offering.

4. Markets

 

The Company operates in markets including[4]

 

Industry (Australia)

Industry Revenue (2018)

Annual Growth Rate (13-18)

Heavy Industry and Other Non – Building Construction

$32 billion

(9.7%)

Railway Equipment Manufacturing and Repair

                        $3 billion

 (3.0%)

Road and Bridge Construction

                       $29 billion

2.1%

5. Competition

 

Major competitors include:[5]

 

  • Brookfield Australia Investments Limited
  • Cimic Group Ltd (ASX: CIM)
  • Ausenco Pty Ltd

6. History

 

1863[6]   

John Walker & Co established (merged with Downer 2001)

 

1870   

New Zealand Public Works Department established (acquired 1996)

 

1898   

Clyde Engineering established (merger 2001)

 

1911   

Evans Deakin and Company established (merger 2001)

 

1933   

Downer and Company limited founded by Arnold Downer

 

1954   

Became a subsidiary of William Cable Holdings

 

1962   

In 1962 engineering firm and locomotive manufacturer, A&G Price Limited, merged with William Cable Holdings and Downer to form Cable Price Downer

 

1983   

In 1983, Downer – still based in New Zealand – celebrated its 50th birthday. Back then, the company had 1200 employees, an annual turnover of $146 million, $133 million of work-in-hand and $43 million in assets.

 

1994  

Merged with HK based Paul Y.ITC

 

1996   

Acquired NZ Public Works Department

 

1997   

Acquired Roche Bros

 

1998   

Listed on ASX

 

2001  

Downer became Downer EDI following the merger with Evans Deakin Industries (Clyde Engineering; Walkers Limited; Ralph M Lee); Mineral Technologies acquired by Roche Mining

 

2003   

Acquired CPG Corporation (formerly Singapore Public Works Department) and Stork ICM Australia

  

2004   

Acquired Snowden Consulting Group and QCC

  

2005   

Acquired Duffill Watts Consulting and Coomes Consulting

  

2006   

Acquired Emoleum

  

2008   

Excell merged into Downer’s Works business in New Zealand.

 

2014   

Downer bought Tenix Holdings Australia in 2014 for $300 million. Tenix was a leader in the electricity, gas and water sectors in Australia and formed the basis of the Downer Utilities business.

 

2017  

Downer’s acquisition of the Hawkins business was finalised in March 2017 and boosted Downer’s non-residential construction business line

Downer has a controlling interest of 87.8% in Spotless. Downer closed its takeover offer on the 28th of August with no further extension

 

2018   

Waanyi downer joint venture awarded century mine contract

Downer awarded beryl solar farm contract

7. Team

 

Board of Directors[7]

 

Michael Harding – Chairman and Independent Non-Executive Director

Grant Fenn – Managing Director and Chief Executive Officer   

Annabelle Chaplain – Independent Non-Executive Director

Philip Garling – Independent Non-Executive Director

Grant Thorne – Independent Non-Executive Director

Teresa Handicott – Independent Non-Executive Director

Nicole Hollows – Non-Executive Director

Peter Watson – Independent Non-executive Director

 

Management Team

 

Grant Fenn – Managing Director & Chief Executive Officer

Michael Ferguson – Chief Financial officer

Sergio Cinerari – Chief Executive Officer, Transport and Infrastructure

Brendan Petersen – Chief Executive Officer, Mining, Energy and Industrial

Steve Killeen – Chief Executive Officer, New Zealand

Peter  Tompkins – Chief Executive Officer and Managing Director, Spotless

David Cattell – Group Head of Strategy, Growth, and Innovation

Julie Wills – Group Head of Zero Harm

Michael Sharp – Group Head of Corporate Affairs and Investor Relations

Steve Schofield – Group Head of Human Resources and Industrial Relations

Robert Regan – Group General Counsel and Company Secretary (Effective from 1 January 2019)[8]


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8. Financials

 

2018 Half Year Results Presentation

 

Financial Year 2017/18 (ended 30 June):[9]

 

Division

Revenue ($’M)

% Change

Profit (before Interest and Tax) ($’M)

% Change

Transport

$2,743.2  

31.2%

$142.5

14.4%

Utilities

$1,783.0  

17.5%

$92.7

10.2%

Spotless

3,093.7

N/A

$156.7

0.0%

Rail

$732.0

56.7%

$39.2

29.4%

EC&M

$2,382.9

20.7%

$65.6

25.4%

Mining

$1,309.4

4.7%

$50.4

(39.6%)

Unallocated

($13.3)

(1.5%)

($342.3)

(253.3%)

Total

$12,030.9

65.1%

     $204.8

(26.3%)

9. Risk

 

Major risks include:[10]

 

Capital risk management

The capital structure of the Group consists of debt and equity. The Group may vary its capital structure by adjusting the amount of dividends, returning capital to shareholders, issuing new shares or increasing or reducing debt. The Group’s objectives when managing capital are to safeguard its ability to operate as a going concern so that it can meet all its financial obligations when they fall due, provide adequate returns to shareholders, maintain an appropriate capital structure to optimise its cost of capital, and maintain an Investment Grade credit rating to ensure ongoing access to funding.

 

Financial risk management objectives

The Group’s Treasury function manages the funding, liquidity and financial risks of the Group. These risks include foreign exchange, interest rate, commodity and counterparty credit risk.

 

Foreign currency risk management

The Group undertakes certain transactions denominated in foreign currencies. As a result, exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters, utilising forward foreign exchange contracts and cross-currency swaps.

 

Interest rate risk management

The Group is exposed to interest rate risk as entities borrow funds at floating interest rates. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings and hedging is undertaken through interest rate swap contracts and the issue of fixed rate debt securities.

 

Credit risk management

Credit risk refers to the risk that a financial counterparty will default on its contractual obligations, resulting in a loss to the Group. The Group’s exposure and the credit ratings of these counterparties are regularly monitored and transactions are diversified among approved counterparties. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas.

 

Liquidity risk management

Liquidity risk arises from the possibility that the Group is unable to settle a financial transaction on the due date. Liquidity risk management is ultimately a Board responsibility and is managed within an appropriate risk management framework under the Group’s Treasury policy.