Downer EDI has announced a large writedown with debt costs and defence playing a part

Downer EDI will post a large full-year loss after announcing major writedowns associated with debt and equity costs and changes flowing from the Defence Strategic Review.

Downer EDI chief executive Peter Tompkins.

Downer EDI has suffered another setback after surprising investors with a $550m writedown on the eve of its annual results, as the contractor took another hit from its services business Spotless and warned of a softer market for its defence business.

The non-cash impairment will result in a statutory net loss of $386m for the full year amid large writedowns relating in large part to the cost of debt and equity and the impact of the Defence Strategic Review on its facilities division, which includes Spotless.

On an underlying basis net profit, which will be reported next week, is expected to come in at about $174m, within the previously flagged guidance.

The vast majority of the downgrade, or $483m, relates to goodwill impairments across the facilities and utilities divisions.

Downer will book a $350m writedown in the facilities division, including Spotless which it acquired in 2017, with changes to financial assumptions driven by changes in the cost of debt and equity playing a part.

The value of the division was also affected by “a reassessment of the defence sector pipeline to reflect tightening in market conditions’’ the company said.

Chief executive Peter Tompkins was promoted internally to the CEO role in February this year after the exit of Grant Fenn and tasked with turning around the company which had disappointed shareholders with a series of profit warnings and share price underperformance.

There were also accounting problems including the misreporting of revenue, resulting in $22.2m in overstated post-tax earnings between April 2020 and June 2022.

That earnings blunder concerned a $170m contract Downer signed with a power company in 2019, covering maintenance, new connections, faults and capital works services, with a schedule of agreed prices for each service.

The company’s troubles claimed the scalps of several executives and former chairman Mark Chellew who resigned in March.

Mr Tompkins said the facilities division had a goodwill carrying value of $1.3bn, primarily related to the acquisition of Spotless, with “several changes” to the assumptions underlying that valuation driving the impairment charge.

“These cover an increase in the after tax discount rate that was substantially affected by changes in the cost of debt and equity and consideration of the defence sector pipeline,’’ he said.

“While we expect both positive and negatives for Downer arising from the Defence Strategic Review, we’ve taken into account market competition and bidding for upcoming major opportunities in this space.

“It is an area that is very attractive to participants, particularly in that sustainment phase ... but that sustainment phase is shifting a little because we are seeing the focus is going to be on the creation of additional capability in defence.

“And we talked about there being a slowdown in some of the minor capital works ... so that is a trend that will continue.’’

Mr Tompkins said Downer had “more than our fair share” of the defence market and would maintain that, but “because of the attractiveness of the market to competition, we will meet the market and so I just wanted to be clear we don’t think its about lowering the win rates for the things we want to bid’’.

The federal government released the Defence Strategic Review in April this year, which included a major reset of the nation’s defence procurement spending.

Downer will also book a $133m writedown in the utilities division, which again was affected by the cost of debt and equity, “the recent underperformance of the business’’ and a reassessment of the forward pipeline in the short to medium term.

Mr Tompkins said the company’s “full year earnings are well below where they should be for a business like ours’’, but “we have completed an important first step’’.

“There are positive signs and I am confident that we are on the right track, that our back to basics approach is the right one and in particular our focused on operational excellence and risk management.

“FY23 was a challenging year for Downer. As we announced at the investor day in April, Downer is undergoing a period of significant and necessary organisational change.

“Against this backdrop, we have delivered underlying earnings in line with what was previously communicated and we are building positive momentum in the transformation program.’’

Mr Tompkins stressed that the vast majority of the writedowns were “non-cash”.

Downer said it was making good progress on its $100m per annum cost out program, and remained on track to achieve the target savings in FY25.

Mr Tompkins told an investor call on Thursday that FY23 was a challenging year, and “the board and executive team have reflected on the challenges’’.

“And we are now working hard to drive improved and more consistent performance, and I really do believe we’ve made strong progress with the transformation program, and we are building momentum.’’

Mr Tompkins said the company’s previously stated goal to reduce its staff headcount by 400 was on track to be achieved by the end of this calendar year.

Downer shares closed 3.8 per cent lower at $4.26 on Thursday.