Downer EDI focus on cash-flow generation
Downer EDI (ASX:DOW) provides engineering and infrastructure management services to customers in the minerals, hydrocarbons, power and transport sectors. In the past three half-year periods, their revenue has declined sequentially from $4.7 billion, to $4.4 billion, to $3.9 billion.
That’s down $0.8 billion, or 17 per cent year-on-year, and the three major divisions – Infrastructure Australia, Downer Mining and Downer Rail were down 18 per cent, 23 per cent and 19 per cent, respectively.
Only their smallest division – Infrastructure New Zealand Division – was up.
Management has aggressively focused on cash-flow generation, and in the December 2013 half-year, we have seen the following cost-cutting.
Relative to the December 2012 half-year, employee benefits were cut by $200 million to $1.5 billion; sub-contractors’ costs were down by $150 million to $0.8 billion; raw materials and consumables were reduced by $250 million to $0.7 billion; and plant and equipment was cut by $100 million to $0.5 billion.
The consensus forecasts net profit for Downer EDI to be around $208 million for each of the next few years, or 48 cents per share on their 435 million shares on issue.
At the current $4.80 per share, Downer EDI is selling on a prospective price-earnings ratio of 10.0, and while this seems reasonable, we are mindful the company’s return on average equity appears to be trending towards single digits over the next few years.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
John Emmi
:
And now Forge looks like it’s on the brink of administration. Businesses related to mining services are going to struggle over the next few years. The players to come out of this will probably do well over the long term if they can avoid chasing contracts which are risky and potentially unprofitable.
Roger Montgomery
:
The only issue is they need throughput and revenue to keep their staff.
John Emmi
:
And now Forge looks like it’s on the brink of administration. Businesses related to mining services are going to struggle over the next few years. The players to come out of this will probably do well over the long term if they can avoid chasing which are risky and potentially unprofitable.
steve glossop
:
More importantly that is $400m of wages lost for our economy. With “cost out” being the new buzz word it is not hard to picture a 6.5% unemployment rate in the next 18 months. Maybe the RBA will be cutting rates again later this year?
Roger Montgomery
:
Hi Steve,
On top of the $400m of lost wages, there is the $300m of sub-contractor costs.
Also there seems to be a huge number of job losses being announced from manufacturing Australia.
The RBA is unlikely to push up the cash rate with these pressures on unemployment unless inflationary expectations increase.
My central case is Australian cash rates will trough at the current record low of 2.5%, unless the emerging market credit worthiness (see the blog I wrote here) deteriorates significantly.
David.