A litany of bad and doubtful news from Downer EDI yesterday.
No interim dividend from Downer and possibly no final as well and full year profit down 14% at a minimum, perhaps more if the troubled Waratah train project for the NSW government throws up any more problems.
And existing shareholders face a big dilution of their holdings if they don’t put in more money in a tough one for four rights issue to keep the company’s investment grade rating.
There’s also the potential for further delays. Instead of starting Waratah deliveries in April (as they company said would happen in a January 27 announcement), they are to be delayed further, with July mentioned as a new target date.
The January 27 update from the company revealed another big write down that shocked the market after investors had thought the problems on the Waratah project in 2010 were behind Downer.
Deliveries have been delayed and delayed. A statement in June of last year promised late December or January, now it’s from late next month to July, an unusually wide target for Downer management to meet.
Yesterday’s interim results and confirmation of a funding raising of $279 million to repair the company’s capital base and maintain its BBB credit rating, will force small shareholders in particular to make a tough decision.
To keep Downer on track, shareholders will have to pay more money to a company that has done its best to squander what it already has.
The $279 million in a one-for-four renounceable equity issue will be at $3.25 a share.
That’s a 17% discount to last Friday’s closing price of $3.92 and represents a 25% expansion of the company’s issued capital.
To maintain their position, shareholders will have to subscribe, or sell the rights to get some value.
Watch the rights trading to see what small and medium sized shareholders really think.
It will take a strong believer to sell their existing shares and buyback in via the rights to maintain their stake in Downer at a lower entry price.
Downer EDI has reported a first half net loss of $103.81 million, but that’s immaterial because of the doubt about the performance of the train contract over the rest of 2010.
Downer shares went into a trading halt yesterday as it released first half results and details of the rights issue.
Downer lifted revenues 20.7% to $3.4 billion in the six months to December.
Downer EDI reported a loss in earnings before interest and tax (EBIT) of $117.556 million, compared to $140.2 million profit for the December 2009 half year.
Excluding the impact of the write down, Downer said, "Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) was $228.7 million, 3.0% higher than the previous corresponding period.
"Underlying EBIT was $132.4 million, 5.5% lower than the previous half year, and underlying net profit after tax (NPAT) was 18.2% lower at $71.2 million."
So a weak result anyway, ignoring the $250 million provision.
The boost in revenues came from the company’s exposure to the resource sector and infrastructure. But all that is being frittered away on the Waratah contract.
CEO Grant Fenn warned a number of factors would affect Downer’s performance in the second half of the year.
He said the Engineering division would continue to see strong competition, high tender costs, the completion of a number of underperforming contracts and the impact of maintaining capacity as a consequence of delayed projects.
He also warned that Downer New Zealand would continue to struggle in the second half.
Subject to weather, the company is looking to the Works business to produce its usual higher second half contribution.
Costs and delays associated with asbestos remediation works at the Cardiff facility at Newcastle in NSW would be included in the current half.
But Downer mining divisions will continue to spend heavily, stepping up major projects, particularly at the Goonyella, Norwich Park and Christmas Creek coal mines in Central Queensland.
Downer said it currently has work-in-hand worth $20.5 billion, comprising the following divisional contributions: Engineering $2.2 billion; Mining $7.6 billion; Rail $5.4 billion; and Works $5.3 billion.
