Key investor upbeat on Downer EDI as another director quits troubled company

A significant shareholder in Downer EDI believes the troubled company can turn around its flagging fortunes and restore investor confidence.

Downer’s acting chairman Mark Menhinnitt is meeting with key investors this week in an effort to shore-up confidence in the company.

A key investor of troubled contract services provider Downer EDI believes the company can turn its flagging fortunes around and restore a decade-old erosion of shareholder value.

Another director, Peter Watson, quit Downer on Monday, three days after chairman Mark Chellew resigned effective immediately, following investor pressure for a “cultural reset”.

Acting chairman Mark Menhinnitt is meeting with key investors this week in a move to shore up confidence in the company.

Mr Watson will leave Downer no later than June 30 this year, with Mr Menhinnitt saying: “Board renewal is an important focus during this period of transition.”

Simon Mawhinney of Allan Gray, which has a 6 per cent stake in Downer and has been critical of the company’s management and its pricing of contracts, said it needed to have room to brief and transform itself.

“People say it‘s a very complicated business but managed correctly, I think it should be – not easy but – certainly manageable,” Mr Mawhinney said.

“Their biggest cost is labour, and if they price that properly, and make sure they enter into suitable contract terms, there’s no reason why they can’t make an economic profit. Other people in the sector are making an economic profit and they should be able to do the same.

“Of course, they need to run the company efficiently. I think that that’s probably been an issue in the past, but it’s not like they’re hamstrung with 20-year contracts that aren’t repriceable.”

Downer’s chief financial officer Michael Ferguson resigned last week, saying he would leave the company within six months, after it slashed its earnings guidance at its half-year results.

Downer EDI’s train yards after the floods at Maryborough in Queensland.

The update sparked a share price plunge of more than 20 per cent. Downer’s shares have clawed back some of the losses, rising 10.6 per cent to $3.34 in the past five days, giving it a market value of $2.24bn.

The company launched a three-month investigation in December over a $22m accounting blunder, at the same time long-time chief executive Grant Fenn resigned and left Downer officially last week.

The investigation found that the company misreported revenue – resulting in $22.2m in overstated post-tax earnings between April 2020 and June 2022.

It concerned a $170m contract it signed with a power company in mid-2019, covering maintenance, new connections, faults and capital works services, with a schedule of agreed prices for each service type.

Downer’s utilities management team – which the company has since replaced – incorrectly assumed that work orders were completed at the end of each month and that costs incurred in excess of the scheduled billable amount related to variations billable to the customers.

The company will restate comparative financial information to incorporate the correction in underlying results. This has seen the restated prior period post-tax earnings reduced by $3.2m.

It has also slashed its annual profit guidance for the second time since December as a result of unprecedented wet weather including the New Zealand floods, labour shortages and losses from the overstated contract.

Profit after tax is expected to be $170m and $190m, down from its $210m to $230m range released in December.