Downer EDI's latest results. Key metrics below:

• Underlying NPATA of $261.2m, up 21.4%
• Gearing reduced to 19.0% (35.7% at June 2020)
• Final ordinary dividend 12 cents per share (Full year 21cps – unfranked)

Over the financial year, Downer EDI has sold/divested a number of their "non core" subsidiaries such as those in the mining sector and their laundries interests, to simplify the business and using the proceeds to reduce the debt and share buybacks (a plus). Given their main verticals are Transport, Utilities, Facilities - the prolonged Covid-19 impact is likely to be small. However, the earnings of this business isn't super exciting and hence this wouldn't probably a stock with phenomenal earnings growth YoY. As a service contractor, the risk is having to slash prices to keep winning bids and tenders.

Given FY 2020 was a challenging for Downer's Hospitality arm, (according to their presentations - virtually no revenue was earned in the 4th quarter), I think these results need to be taken with a grain of salt. Whether these business and capital restructures bear fruit for shareholders is yet to be seen.

Disclosure: Holder

03-Dec-2020:  Downer Completes $1.4bn Sustainability Linked Loan Facility

This new debt facility is unique in that it is a new $1.4 billion syndicated sustainability linked loan facility. The new committed facility comprises three, four, five and six year tranches, and has been structured to enhance the debt maturity profile, reduce average borrowing costs and provide flexibility as the Group continues its program of divesting non-core businesses. The sustainability aspect of the new facility is underpinned by KPI metrics relating to Downer’s greenhouse gas emissions reductions and social sustainability (being cultural awareness and mental health and wellbeing training of Downer employees) that, if realised, will lead to a reduction in borrowing costs under the facility.

These sustainability KPIs are unique to Downer and reflect the Group’s continued commitment to its sustainability performance and investment in its people.

The Chief Financial Officer (CFO) of Downer, Michael Ferguson, said the refinancing was the final step in the consolidation of the Group’s debt platforms subsequent to achieving 100% ownership of Spotless and provided an ideal opportunity to align the Group’s financing and sustainability strategies.

“The refinancing of Spotless debt is expected to reduce total borrowing costs given Downer’s financial strength and investment grade credit rating,” Mr Ferguson said. “The sustainability features of the new facility are also a welcome validation of the Group’s ongoing commitment to a market leading sustainability strategy. As one of the largest employers in Australia and New Zealand, we are pleased to have the ultimate loan facility outcomes linked to the development of our workforce and our decarbonisation commitments.”

Mr Ferguson thanked the bank group for their support of the new facility which received strong backing from a range of domestic and international financiers, comprising existing and new lenders, and was significantly oversubscribed.

The facilities were jointly arranged by Australia and New Zealand Banking Group Limited, BNP Paribas, HSBC, Mizuho Bank Ltd and Sumitomo Mitsui Banking Corporation with BNP Paribas and HSBC acting as Joint Sustainability Co-ordinators.

Downer Group is rated BBB (Stable) by Fitch Ratings.

--- ends ---   [I hold DOW shares.]

02-Dec-2020:  Downer to divest 70% of Laundries business

The streamlining continues.  Check out the name of the PE mob that is buying that 70% of Downer's Laundries business - Adamantem Capital - reminds me of Adamantium, possibly the rarest metal on earth, because (a) it's fictional, and (b) nobody knows what metals went into making it because the metal's "inventor" fell asleep while making it out of a heap of different metals and then woke up to find it had formed itself.  For those who aren't geeks like me, Adamantium is the hardy metal that coats the skeletons of both Wolverine and his female clone from the movie "Logan", Laura (a.k.a. X-23), and it's what Wolverine's and Laura's "claws" are made of. 

But I digress...

Downer EDI Limited (Downer, ASX:DOW) announced today it had entered into an agreement to sell 70% of its Laundries business to an entity established by Australian private equity firm, Adamantem Capital (Adamantem).

Under the agreement, Downer will sell a 70% interest in Laundries and receive total proceeds of approximately $155 million on a cash and debt free basis. Following the transaction, Downer will cease to consolidate the Laundries business and will recognise its residual 30% ownership interest as an Equity Accounted Investment.

The Chief Executive Officer of Downer, Grant Fenn, said the transaction represented a significant step in Downer’s Urban Services strategy.

“The sale of 70% of Laundries achieves the objective of removing one of the most capital-intensive businesses from the Downer balance sheet,” Mr Fenn said. “Laundries continues to perform well as it recovers from the COVID-19 lockdowns in New Zealand and Victoria and by retaining a 30% interest we will participate in this ongoing recovery.

“We look forward to working closely with Adamantem and its management team providing market-leading services for our customers and employment opportunities for our people.”

Adamantem Capital Managing Director, Chris Adams, said: “Adamantem is proud to be investing in the leading commercial laundry business in Australia and New Zealand.

“We intend to invest to grow the business for the benefit of the 1,900 loyal employees and numerous longstanding customers. We look forward to partnering closely with Downer and the management team and to take advantage of the exciting opportunities that lie ahead.”

The sale is subject to customary conditions precedent being met, including regulatory and some customer approvals, and is expected to complete by the end of March 2021.

About Downer:   "Downer is the leading provider of integrated services in Australia and New Zealand and customers are at the heart of everything it does. It exists to create and sustain the modern environment and its promise is to work closely with its customers to help them succeed, using world-leading insights and solutions to design, build and sustain assets, infrastructure and facilities."  For more information visit www.downergroup.com

[I hold DOW as a play on increased spending on transport infrastructure - both new builds and maintenance of existing transport infrastructure - Downer specialise is roads and rail.  They had too many varied businesses within their structure, but they are in the process of selling or otherwise exiting their non-core businesess, particularly the very capital-intensive businesses like this one - their laundries business.  As I said at the top, "The streamlining continues."  They are also paying down their significant debt as they do this, so this is positive in two ways, they will become a better and more focused business and they will have less debt.]

20-Oct-2020:  DOW: Link Alliance Awarded C5 and C7 Contracts for City Rail

I hold DOW shares, but I have reduced my exposure recently due to a couple of small headwinds that DOW face with the ACCC not being happy with a couple of their proposed divestments.  See:

https://www.businessnewsaus.com.au/articles/downer-s-sale-of-spotless-laundries-in-jeopardy-as-accc-raises-concerns.html

https://www.accc.gov.au/public-registers/mergers-registers/public-informal-merger-reviews/south-pacific-laundry-spotless-laundries

https://www.accc.gov.au/media-release/alscos-spotless-garments-acquisition-raises-preliminary-competition-concerns

I think there could be a headline or two coming that could spook the market somewhat in relation to Downer's divestment strategy, which could possibly provide a lower top-up opportunity to acquire further DOW shares.

I also note that companies that have taken the ACCC to court have tended to win those cases in recent times, and the ACCC do not have a very good track record in court.  A recent high profile example was when the ACCC tried to block the TPG-Vodafone merger, and David Teoh (of TPG Telecom) took the ACCC to court and won, and obviously TPG have now merged with Vodafone Australia. 

Despite a recent capital raising, Downer still have significant debt, more than I am usually comfortable with actually, however their various proposed divestments will both reduce debt and create a more streamlined business that is firmly focussed on Australian and New Zealand infrastructure, a great space to be a top-tier player in right now, which DOW are.

The main divestment that I want to see completed is the sale of Downer's Mining Services business.  At the beginning of this year, Perenti (PRN, formerly Ausdrill) were in discussions with DOW about acquiring that business - see here - but Downer announced in mid-March that they were suspending those discussions to enable them to fully concentrate on successfully navigating the Group through the pandemic.  It is also obvious that selling off a business like that in the middle of a global pandemic would be more like a fire sale than an orderly divestment of a non-core asset. 

I would imagine that those discussions would be either back on now or very close to resuming.  I would also expect that PRN would definitely NOT be the ONLY suitor interested in that Mining Services business, which should do much better under the management of a company that focusses predominantly on mining services - rather than a company like Downer whose main focus now is on infrastructure construction and maintenance as well as facilities management and maintenance. 

Some companies can be succesful conglomerates, such as SOL and WES, with very varied and diverse business interests, but others, such as DOW, need to pick their area of specialty and stick to it.  I say this about DOW because they have had a chequered history, with some multi-billion dollar cost blow-outs (i.e. the Waratah Trains project) and they have failed to demonstrate that they can succesfully manage such a diversified group of businesses profitably, hence their high debt levels, cost blow-outs on multiple projects and sometimes undisciplined acquisition history.

I think DOW are in the midst of a positive turnaround, and are trying to position their business in a very good space, being infrastructure construction and maintenance, particularly transport infrastructure construction and maintenance (road + rail mostly).  They have always played in that space, and their success has been mixed, however as a more streamlined and focussed company, I think there is significant upside for them to perform a lot better there than they have in the past.  

However, I still view them as a turnaround, and I tend not to put too much money into such companies until the evidence suggests that the turnaround is well on track.  As I said earlier in this post, they face a couple of possible headwinds, particularly with the ACCC perhaps attempting to block a couple of their Spotless Group divestments.  I doubt whether the ACCC will be interested in their impending mining services business divestment, because that's already a very competitive space, and one less player (DOW) in it won't make much difference at all.  However, I want to see all of these divestments done and dusted to give me some comfort that this turnaround is really on track.  Announcements such as today's (see link at the top) are positive, but they are just part of the story for me.  For now, I maintain a small position in DOW, with a view to increasing it when things look better still for this company.

12-Aug-2020:  Annual Report to shareholders

That contains:

1. Appendix 4E – results for announcement to the market for the year ended 30 June 2020;
2. 2020 Annual Report;
3. Market release dated 12 August 2020;
4. Investor Presentation; and
5. Appendix 4G – Key to Disclosures Corporate Governance Principles and Recommendations.

I hold DOW Shares.  They have made a loss for FY20, however what I'm more interested in is their future, which is neatly outlined in the "Downer Group Portfolio" graphic on page 3 of the annual report, which shows what they are going to be concentrating on going forwards, and what they are going to sell, and what they are going to wind down.  I remain of the opinion that they are very well positioned to capitalise on increased transport infrastructure spending in Australia, and that's the main reason why I hold them and why I did participate in their recent EO (which closes this coming Friday).

They also released a couple of other announcements today:  Takeover Booklet - Downer's off-market bid for Spotless   and   Takeover Booklet.

26-May-2020:  Downer expands Fortescue relationship with $450m contract

Downer EDI Limited (Downer, ASX: DOW) announced today it was expanding its relationship with Fortescue Metals Group (Fortescue, ASX: FMG) through the provision of Early Mining and Maintenance Services at the Eliwana iron ore mine, located in the Pilbara region of Western Australia.

This is the second Eliwana project package to be executed by Downer, the first being the Bulk Earthworks contract which commenced in late 2019.

The new agreement is valued at approximately $450 million over five years.

Under the agreement, Downer will complete early works operations over two years as the mine site is established. After this initial two-year term, the operations will transition to Fortescue’s autonomous mining fleets. Downer will remain at the mine site and provide maintenance services for a further three years.

The Chief Executive Officer of Downer, Grant Fenn, said Downer was a leading provider of mining services in Australia.

“Downer has a long-standing relationship with Fortescue and we are very pleased to be expanding our services,” Mr Fenn said. “We are proud to be supporting the development of the Western Hub and the communities that will benefit from the mine.” 

About Downer: 

Downer is the leading provider of integrated services in Australia and New Zealand and customers are at the heart of everything it does. It exists to create and sustain the modern environment and its promise is to work closely with its customers to help them succeed, using world-leading insights and solutions to design, build and sustain assets, infrastructure and facilities. Downer 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. It also owns 88% of Spotless Group Holdings Limited. For more information visit downergroup.com 

Disclosure:  I hold DOW shares.

24-Apr-2020:  https://www.railexpress.com.au/contractors-shortlisted-for-morley-ellenbrook-line/

01-Aug-2018:  I meant to add the following to my last straw (in #Industry/Competitors):

Some of Downer's Competitors:

Cimic (CIM) and their various divisions are generally regarded as direct competitors of Downer, as are LendLease (LLC)..

RCR Tomlinson (RCR) in solar farms, railway signalling and electrical systems, minerals processing facility construction and operation, infrastructure construction, maintenance and operation, and various other areas.

All of the miriad of mining services companies compete directly against Downer's mining services division.

Hansen Yuncken, John Holland (which was purchased in 2015 by China Communications Construction Company International Holding Limited - CCCI), Watpac (ASX: WTC), Cimic (ASX: CIM, the old Leighton's, who also own Thiess), BGC Group, Fulton Hogan, CPB Contractors, Multiplex (owned by Brookfield, a Canadian private equity group), Laing O’Rourke Australia, Probuild, Nexus Infrastructure, ADCO Constructions, LendLease(ASX:LLC) and plenty of others - in non-residential construction.

Monadelphous (ASX: MND) in mining and engineering construction services, solar and wind farm construction, maintenance and operations, and especially in water infrastructure, oil & gas, and many other areas in which Downer operate.

There are plenty more.

One of Downer EDI's strongest areas is transport infrastructure construction, and they have a lot of competition there from both big, medium and small companies, including Lendlease (LLC), Probuild Civil, Abigroup, Fulton Hogan, Seymour Whyte, York Civil, Civil Mining and Construction (CMC), Ertech, Georgiou Group, VEC Civil, Guideline, John Holland, Burton Contractors, Golding (owned by NWH), CIM (Cimic), Boral (BLD) and a couple of overseas-based companies that operate here.

It's not easy to identify Downer's enduring competive advantages, if they have any.  However Downer look like a reasonable sector play to me.  Their issues with Spotless Group, and prior issues with the Waratah Trains contract in NSW are just two reasons why investors might still be a little hesitant to dip their toes back in this particular pond.  

While LLC (LendLease) have been moving NE at a good clip for 6 months now, CIM and DOW have just begun to be positively re-rated by the market in the past month.  There is likely more upside from here. 

And I prefer DOW to CIM.