By Darren Gray
Downer EDI investors have backed the mining services and infrastructure company's plans to reshape the business, saying it will become stronger, leaner and well positioned to capitalise on a government spending boom to stimulate the economy.
The ASX-listed $2.5 billion company unveiled a corporate overhaul on Tuesday including a $400 million equity raising and plans to take full ownership of the Spotless group, and re-confirmed its intention to exit capital-intensive businesses like mining and laundry services.
Mining services and transport business Downer EDI will undertake a $400 million equity raising.Credit: Joe Armao
John Ayoub, portfolio manager at Downer investor Wilson Asset Management, said Downer would remove some of the "overhang" on the stock as it restructured and repositioned, removed costs and brought gearing within its target range.
Mr Ayoub said Downer's expected underlying net profit of $210 million to $220 million for 2019-20 was positive, with the company generating solid cash flow despite the coronavirus.
"The earnings are a lot more resilient than the market had anticipated, so that's pleasing as a shareholder, and you expect that there will be somewhat of a re-rating after this," he said.
Mr Ayoub said the changes would position Downer as a services-oriented business leveraged to infrastructure and government spending.
The [Downer] earnings are a lot more resilient than the market had anticipated, so that's pleasing as a shareholder.
John Ayoub, portfolio manager at Wilson Asset Management
"If you think about the way that we're going to come out of this recession that we're in today, it's going to be linked to government spending and investment. Downer has given themselves that flexibility, by selling some of the mining businesses, or raising this capital, to actually grow where we expect the market to grow more over the next three to five years."
There have been about 1000 redundancies at Downer due to the economic shock from COVID-19, mostly at Spotless, but also in construction and head office. The company employs about 50,000 people.
Downer said the changes announced on Tuesday would enable it to focus on its core urban services businesses which have a high proportion of government contracts. Downer is a diverse company that manufactures and maintains trains and trams, builds bridges and maintains roads. Via Spotless it has a major hospitality, cleaning and laundry business.
The company said the $400 million would be used to buy the remaining shares in Spotless it doesn't own, strengthen its balance sheet and provide funds to invest.
"We have identified areas of our business where restructuring is required and are taking the necessary steps to exit less profitable markets and contracts and to right-size the cost structure of these businesses. We are confident that the actions we are taking will make our business more competitive and allow us to drive improved returns," said Downer chief executive Grant Fenn.
"We are focused on continuing to grow our services businesses which require relatively low levels of capital and deliver more predictable revenue in the long term," he said.
Downer has forecast 2019-20 underlying EBITA (earnings before interest, tax and amortisation) of $410 million to $420 million. It is expecting a statutory net loss of around $150 million to $160 million, due to $386 million of charges including a $165 million non-cash impairment of Spotless goodwill, and $142 million of portfolio restructuring/exit costs. There's also $44 million of legal settlements, $19 million of historical contract claims adjustments and $16 million of payroll remediation costs.
Downer will raise the $400 million via a fully underwritten 1 for 5.58 accelerated non-renounceable pro rata entitlement offer. The $3.75 per share offer price represents a 12 per cent discount to Monday's $4.26 close.
Downer bought into Spotless three years ago, but did not achieve the 90 per cent compulsory acquisition shareholding level to mop up all outstanding shares.
But on Tuesday morning the company said it had entered into a call option deed with US hedge fund Coltrane Master Fund that gives it a call option over 2.99 per cent of Spotless shares. On exercise, this would increase Downer's ownership of Spotless above the 90 per cent compulsory acquisition threshold, meaning remaining shareholders will be forced to sell their shares to the company.
In a note to clients, Credit Suisse analyst Paul Butler said the consolidation of Spotless and urban services focus were positives, and Downer's capital raising was likely to be well backed.
Downer went into a trading halt early on Tuesday morning that is expected to be lifted on Wednesday July 22.