Downer EDI wins A$35b Government contracts in NZ, Australia but Covid hits operations

Giant listed works business Downer EDI has won Government contracts here and in Australia worth A$35 billion.

But its New Zealand operations have been amongst the hardest-hit by Covid.

Grant Fenn, chief executive of the business listed on the ASX and NZX, today addressed the company’s annual meeting, telling how the state on both sides of the Tasman drove most of its work.

“Government is getting bigger every day and 90 per cent of our work-in-hand, which totals more than A$35 billion, now comes from contracts with governments and owners of critical national infrastructure in Australia and New Zealand,” Fenn told shareholders.

“This compares with 56 per cent five years ago – a huge change.

“In the core business, the most heavily impacted have been our New Zealand operations with a level 4 shutdown and our facilities and asset services with the shutdown of small scale construction and state border closures,” Fenn said.

He was referring to the trading period from July to September, the first three months of the company’s 2022 financial year.

“We are hopeful that the worst is over with restrictions on work and mobility starting to lift. Demand for our services remains strong for the remainder of the financial year 2022,” Fenn said.

Downer has a A$400 million share buyback scheme under way and has so far bought more than A$90m. It plans to continue that programme into the 2022 financial year.

Its road services business had been very successful in developing new green products that
use a high level of recycled or re-purposed materials from roads, road sweepings, glass and other waste that otherwise would go straight to landfill. These products are very popular with customers, particularly local governments, Fenn said.

The company has sold its urban services portfolio for A$628m.

Fenn said the 2021 year was an important one for Downer. Twelve months ago, it laid out a number of priorities.

“We said we needed to deliver strong earnings and cash in the 2021 financial year and earnings were up 21 per cent, cash conversion was 101 per cent of EBITDA and margins increased by 0.7 percentage points,” he said.

“Overall, it was a very solid financial performance particularly in light of Covid-19 operating restrictions. The board declared a final dividend of 12 cents per share, that’s a 60 per cent payout ratio for the second half of the year and full year dividends totalled 21 cents per share.”

It intends to increase the dividend per share over time.

“We said we needed to complete the sale of our non-core assets. During the year we made very good progress and have since announced the sale of our last mining business, Open Cut East.

“The divestment of our mining, laundries and a large chunk of hospitality contracts has realised A$778m in total proceeds – a very good outcome for shareholders. We have received A$537m to date with the remainder expected to be received in the next two months,” Fenn said.

The Downer portfolio was now less cyclical, with lower capital requirements and stronger cash conversion.

Importantly, it had scale, diversity and financial strength.

An increasing focus was going on sustainability, driven partly by its customers and capital providers.

Asset sales helped achieve that, Fenn said.

“The divestment of our mining and laundries assets will reduce our scope 1 and 2 emissions by 35 per cent or 206,000 tonnes of carbon dioxide equivalent. Downer’s technical capabilities and investment in new technologies will not only lower capital intensity for our own business but increasingly we are helping our customers reduce their carbon emissions,” Fenn told shareholders.

Mark Chellew, chairman, said Covid had limited his ability to visit Downer work sites or meet senior managers face to face.

The company is trading on the ASX around A$6.46 today, giving a market cap of A$4.48b.

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