Excuse me for being more than a bit cynical – but the reason for Downer EDI (DOW) trotting out a share buyback yesterday of uncertain size is blatantly clear.
Directors are forecasting weaker earnings in the 2014-15 financial year and to make sure the share price isn’t trashed, shareholders are being asked to support the company’s shares to protect their value.
Now that might be a good idea in theory, but shouldn’t Downer EDI be husbanding its reserves and continuing to cut costs to try and resize itself to meet the expected fall in revenues (for a second year) and earnings?
Certainly the market wasn’t taken in by the buyback – the shares fell 4.1% to $4.58.
That was on a day when the overall market fell 0.4%.
DOW YTD – Downer EDI shares sold down, despite buyback announcement
Downer’s announcement of a share buyback program yesterday, starting later this month, was short of required detail.
The company did not specify how large the buyback would be and said it would depend on capital requirements and its stock price.
But CEO Grant Fenn said yesterday that there was a case for the company investing in its own stock now that it was trading at a discount to peers. "We don’t believe this discount is justified," he said.
Downer will try and keep shareholders happy with a final dividend of 12c a share (up from 11c in 2012-13) fully franked. With the interim of 11c a share (10c previously), the company will pay a total of 23c share for 2013-14, up from 21c in 2012-13.
The company saids its Dividend Reinvestment Plan will be suspended whilst the buy-back program is in operation and consequently will not operate for this dividend, so for whatever reason, it doesn’t want to retain cash.
Investors yesterday saw through those measurers and were more concerned about the company’s forecast for a tougher 2015, which it says will see it battling “very difficult” mining markets.
Downer said yesterday it was targeting net profits after tax of about $205 million for 2014-15, after reporting net profits in the year ended June 30 rose 6% to $216 million, slightly higher than its guidance of $215 million.
The company told the ASX in yesterday’s release that resources-based spending in 2014-15 is expected to be “flat, or declining, on current low levels”.
"Underlying mining commodity markets are currently very difficult for a number of our major customers.
"The short-term impact of this pressure on service providers like Downer is hard to predict,” the company said.
The company has already lost a huge contract mining deal with BHP’s central Queensland coking coal mining operation.
That news damaged investor sentiment towards Downer after its shares fell more than 11% on the day the loss of the contract – to remove waste from the miner’s Goonyella coking coal mine would end two years earlier than expected – was announced earlier in the year.
The loss of the BHP contract will cut Downer’s work-in-hand by about $360 million over 2014-16, according to the company’s statement yesterday.
Downer said yesterday that full-year group revenue for 2013-14 slid 15% to $7.7 billion, while group earnings before interest, taxation, depreciation and amortisation (EBITDA) fell 7% to $607.5 million.
Profits fell in all of Downer’s operating divisions. Earnings before interest and taxation (EBIT) dropped 17% to $191.1 million in the group’s infrastructure business; fell 1.6% to $171.4 million in its mining business as contracts ended or were scaled back; and slumped 62% to $22.1 million in its rail business because of declining resource sector demand for locomotives.
Mr Fenn maintained the previously stated comments that the company will use its strong balance sheet to pursue mergers and acquisitions. He said Downer would look for opportunities that "are strategic, the right price and grow our capability”.
"The mining based construction and services markets were subdued during the year and each of the company’s three divisions – Infrastructure, Mining and Rail – reported lower revenue,” Mr Fenn said.
“We did move quickly in each of our businesses to reduce costs and improve productivity and total expenses were 16.5% lower than last year. Along with a number of initiatives to drive organic revenue growth, this will be a continuing theme into the new financial year.
“Our cash performance continues to be very strong, with cash conversion at 94.7% of earnings before interest, tax, depreciation and amortisation (EBITDA). Downer’s gearing is now at 1.6% and we will soon be net cash positive,” Mr Fenn said in yesterday’s statement.
