Downer EDI shares surge on better than expected earnings

Downer shares have surged on better than expected earnings, with a softer jobs market helping the company to execute a $175m cost cutting drive.

Downer Group managing director Peter Tompkins. Picture: Hollie Adams/The Australian

Downer EDI boss Peter Tompkins says a softer jobs market is helping to lower costs and drive efficiencies at the infrastructure services provider as it closes in on a $175m cost cutting target.

Touted as a “turnaround” year for the company, Downer returned to profitability in the 12 months to June, with its higher than expected earnings and bumper dividend pleasing investors who sent the company’s share price surging to a two-year high.

Mr Tompkins, who took the reins in February 2023, has spearheaded the company’s turnaround following the challenges of Covid-19, the launch of shareholder class actions over corporate disclosures, and a NSW corruption inquiry that all dented investor confidence in the $3.8bn company.

On Friday, the company reaffirmed that its $175m cost-out program was on track to be met by the end of 2024-25, with $130m in gross savings already achieved in 2024-25, exceeding the $100m target the company previously set for the financial year.

Downer slashed about 400 staff in the 2023 calendar year, and that has been followed by more cuts this year.

Mr Tompkins said a “soft softening” of the jobs market over the past six months was supporting improved efficiencies across the company’s operations.

“What I think is starting to play out is lower turnover, and with lower turnover you don’t have to stop, induct, reset until you get a baseline productivity. That is helping our front-line operations,” he told The Australian after handing down the full-year results.

“And what I’m also seeing is that with a better balance of supply and demand of labour, in the main, you’re not reliant upon the same group of people to be doing extended amounts of overtime.

“And whilst we still pay the overtime, we’re not generally paying the double time. And you can manage people and fatigue and productivity within much better bounds.”

Mr Tompkins said labour market conditions varied across the industries in which Downer operates - which include rail, roads, utilities and defence - ranging from “dramatic” improvements in the supply of front-line facilities management roles to tighter conditions for specialist technical workers needed to support green energy projects.

Downer’s underlying earnings (EBITA) rose 20.6 per cent to $210.1m, slightly ahead of analyst estimates, while statutory net profit came in at $82.1m – a marked turnaround from the previous year’s $385.7m loss, which was affected by write-downs on the acquisition of cleaning and catering services provider Spotless.

Pro forma revenue across the Downer group was 5.5 per cent higher, at $11.7bn, on the back of stronger performances in the company’s transport and utilities divisions, which were up 7.8 per cent and 6.5 per cent respectively, to $6bn and $2.4bn.

However revenue in the facilities business slipped 0.7 per cent to $3.2bn in what was described as a “challenging market”.

While no formal earnings guidance was provided, Mr Tompkins said revenue across the group was likely to remain flat in the year ahead.

“That’s not because of challenges - it’s unashamedly because of our focus and commitment to quality of earnings,” he said.

“We have pointed out our work in hand so we see a really healthy pipeline of opportunities in FY25. That growth side of it - modest to flat. But then as we enter FY26, and we get further into our reset and transformation, we see really good sustainable pipeline of revenue growth and also earnings growth.”

Work-in-hand - a measure of the company’s pipeline of future work - was 1 per cent higher at the end of June at of $38.5bn.

UBS analyst Nathan Reilly described Friday’s results announcement as “solid”.

“Earnings supported by ongoing cost control, with FY24 cost out delivered above target,” he said in a note to clients.

“Solid operating cash flow performance also a standout.”

Downer will pay a final dividend of 11 cents a share, 50 per cent franked, bringing its full-year payout to 17 cents, up from 13 cents in the previous year.

The company’s better than expected results pleased investors, with the company’s share price surging 18.8 per cent to $5.68 - its highest level since May 2022.