More than $400 million blown off Downer after wind farm update

More than $400 million was wiped off the value of infrastructure group Downer EDI on Wednesday due to financial problems encountered by its German partner in a Victorian wind farm project and a Credit Suisse downgrade.

In a new report released on Wednesday, Credit Suisse analysts downgraded the stock from neutral to "underperform" and lowered its price target from $7.40 to $7.10.

Shares in infrastructure company Downer EDI were blown off course on Wednesday, after an announcement about the Murra Warra wind farm project.Credit: Sitthixay Ditthavong

The downgrade came less than 24 hours after Downer released a statement to the ASX saying that Senvion, a manufacturer of wind turbines and its partner in the $380 million first stage of the Murra Warra wind farm project, had gone into administration. Senvion is majority owned by US-based investment fund Centrebridge.

Downer shares closed down 9.1 per cent at $7.16, knocking more than $400 million off the company's value, pushing it down to about $4.26 billion.

Downer has completed about $100 million of plant works at the wind farm project, about 30 kilometres from Horsham in the Victorian Wimmera.

While 26 of 61 wind turbines have already been erected by Senvion, its financial  problems are a potential blow to the project.

In the statement, Downer said: "Work is continuing to progress onsite and Downer has initiated discussions with Senvion's court appointed custodian and other key stakeholders, including Partners Group (the owner of the wind farm), to establish a process for securing delivery of outstanding equipment and completing stage one."

"Downer will be assessing whether there is any potential financial impact on Downer and consequently any impact on its guidance for the 2019 financial year," it said.

Downer said Senvion had said publicly that it would keep working to "continue to safely deliver and operate wind farms in Australia."

Credit Suisse analysts said Senvion was responsible for "manufacture, transport, erection and commissioning of the turbines", and Downer was responsible for the rest of the works at the wind farm.

"Despite Downer's minor share in the project, it is jointly and severally liable under the contract," Credit Suisse said, adding that Downer had said it had a "substantial bank guarantee from Senvion".

Credit Suisse lowered its post-tax profit estimate for Downer from $350 million to $332 million. Downer has a guidance of $352 million.

"We believe the catalyst for the market update at this point is that Senvion's court appointed custodian may be attempting to offload the cost of completing the project to Downer, and the bank guarantee may be insufficient to cover the liability," Credit Suisse's equity research team wrote. They expect it may cost an extra $20 million.

"We are concerned that Downer may have similar excess risk exposure on other projects," Credit Suisse said.

But analysts at Bank of America Merrill Lynch reiterated their "buy" rating, and said the sell-off of Downer's shares presented a "particularly attractive buying opportunity".

In a note to clients BAML analysts said it understood materials for another 15 wind turbines destined for Murra Warra were either already on site or in Australia, while the materials for the final 20 turbines were in transit to Australia.

"In our view...today's sell off appears overdone. We believe it is premature to estimate any potential impairment," the analysts said.

According to a Bloomberg report in March, Centrebridge purchased Senvion for 1 billion euros in 2015 from Indian firm Suzlon. But, according to Bloomberg, "a succession of profit warnings and worries about Senvion's financial stability have wiped out more than 90 per cent of the value of the Centerbridge funds' majority equity stake."

Since 2003 Downer has delivered 14 wind farms across Australia, including Ararat, Mt Mercer and Waubra in Victoria, and Taralga and Boco Rock in NSW.

Downer is a major Australian infrastructure company which builds roads, bridges and tunnels, rail assets including track and railway stations. It also builds and maintains electricity and gas network assets.