Downer EDI board under pressure for ‘destroying shareholder value’, CFO quits

Investors say Downer EDI’s problems stem back years and change is needed at the top of the Mark Chellew-chaired company after its CFO exits following a profit plunge.

Downer EDI shares were trading flat on Wednesday afternoon.

Downer EDI’s directors are set to come under pressure as investors agitate for change at the contracting services company after its two most senior executives resigned and its shares tanked following another profit downgrade.

Downer’s chief financial officer resigned from the company on Wednesday - two days after long-time chief executive Grant Fenn - after its slashed earnings guidance at its half-year results.

Investors say Downer’s problems stem back years and change was needed at the top of the Mark Chellew-chaired company.

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

Following the earnings downgrade, Downers shares slumped more than 24 per cent across two days. But on Wednesday, its share price stabilised, rising 0.6 per cent to $3.18 - giving it a market value of $2.14bn against a flat broader share market.

Downer EDI chairman Mark Chellew.

Simon Mawhinney of Allan Gray, which has a 6 per cent stake in Downer, was mindful of talking about individuals but said change was needed.

“Downer over almost a decade has destroyed a lot of value for shareholders,” Mr Mawhinney said.

“They paid an exorbitant amount for Spotless ($1.2bn). They sold their mining services business for a very low price and their risk management and overseeing of the contracts they have entered into had failed to secure reasonable margins or resulted in the company assuming unacceptable risks.

“The combination of all that is not acceptable and that’s why I felt that a cultural reset is necessary.”

The $22m earnings blunder 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.

“There’s just too many excuses and not enough internalisation of the problem, which is ‘Hi, my name is Downer and I continue to write poorly priced or termed contracts’,” Mr Mawhinney said.

Simon Mawhinney, of Allan Gray, says there have been too many excuses.

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

UBS analyst Nathan Reilly said Downer’s interim earnings were “disappointing” while the outlook was “weak”.

“UNPATA (underlying net profit after tax and acquisition amortisation) guidance downgraded a further 18 per cent at the midpoint on a soft utilities outlook, an expected slowdown in Government works, and wet weather in New Zealand,” Mr Reilly wrote in a note to investors.

“Weak cash flow performance, increased leverage and a reduced dividend will further disappoint the market. Downer recently announced the divestment of its Australian Transport Projects business and continues to assess further portfolio rationalisation alongside a broader transformation agenda under incoming chief executive, Peter Tompkins.”

In a statement to the ASX, Downer’s board said Mr Ferguson - who has been the company’s chief financial officer since late 2016 - will leave his role within the next six months after a replacement has been appointed and “transition of his responsibilities has been completed”.

Mr Tompkins, who has succeeded Mr Fenn as chief executive, thanks Mr Ferguson for his “many contributions to Downer”.

“I consider Michael to be one of the best commercial and financial professionals I have worked with. Importantly, he has built a strong team around him with significant depth in capability. I am very appreciative of him staying on over the coming months to assist with the transition process,” Mr Tompkins said.