Transport services in the slow lane but renewables energise Downer EDI

A slowdown in government spending in Victoria is putting the brakes on Downer EDI’s transport services business, but renewable energy projects remain a strong growth opportunity.

Downer EDI unveiled improved earnings in the first half, despite a small decline in revenue.

A slowdown in government spending in Victoria is putting the brakes on Downer EDI’s transport services business, but the company says renewable energy projects remain a strong growth opportunity, despite the uncertainty surrounding US President Donald Trump’s fossil fuel agenda and its potential impact on the global energy transition.

The engineering and infrastructure services company provides outage, maintenance and operational services for solar, hydro and wind farms around the country, and has been chasing work in the renewables space in the final stages of a two-year turnaround phase under managing director Peter Tompkins.

Speaking after handing down the company’s half-year results on Thursday, Mr Tompkins said Australia’s commitment to the energy transition continued to provide opportunities for the company to support renewable energy projects.

“We have really good prospects supported by four key tailwinds which underpin our strategy … including transitional energy and the need for new power infrastructure to support a lower carbon economy,” he said.

“We do not believe the energy shift will be influenced by US policy changes. This is what our customers are also telling us. The outlook for the energy and utilities business is very positive and is a key growth factor for the group.”

Mr Trump’s abandonment of the US climate goals, and his ‘‘drill, baby, drill’’ mantra, pose a major test of the global commitment to the energy transition. But some believe Australia has an opportunity to speed up investment in clean energy by attracting investors who were previously targeting US projects. More than $9bn worth of renewable energy projects in Australia secured ­financial commitments in 2024 – the highest in six years – according to new data from the Clean Energy Council, adding to hopes that Australia could see a much-anticipated rapid increase in zero emission capacity.

Downer EDI managing director Peter Tompkins. Picture: Hollie Adams

Mr Tompkins’ bullish comments came as Downer EDI unveiled improved earnings in the first half, despite a small decline in revenue.

Improving margins across the business led to a 37.1 per cent increase in EBITA to $204.4m in the six months to December, while statutory net profit was 4.7 per cent higher at $75.5m.

The energy & utilities segment – including work on major water, power and telecommunications projects – delivered the strongest earnings growth, with EBITA rising by 38.8 per cent to $52.6m.

Revenue across the group was down 5.2 per cent to $5.49bn, driven by a 7.1 per cent fall in Downer EDI’s transport division – which includes construction and maintenance of road, rail and airport infrastructure – to $2.74bn.

Mr Tompkins said the result was driven by a slowdown in government spending in Victoria.

“The lower contribution from our Australian roads business continues to be affected by declines in transport agency spend, most noticeably in Victoria,” he said.

“We expect the level of Victorian transport agency spend to remain soft for the rest of the financial year compared to historical levels.

“I believe the prospects for roads remains positive, as we expect a return to a historical average spend level over time, which will align to network maintenance requirements and road user expectations, and the need to address what is a building backlog of maintenance to address network degradation.”

Work-in-hand – a measure of the company’s pipeline of future work – dropped by 2.9 per cent to $37.4bn, but Mr Tompkins said it was a result that reflected the company’s decision to focus on more selective tendering and quality revenue streams.

“We know what profitless or loss-making revenue feels like, and we’ve worked very hard to eliminate that from our book,” he said.

“We’re seeing the benefits of that in being able to posture to those opportunities where we have the expertise and the alignment.

“We don’t feel like we’ve got a work in hand problem. We’re bidding less, winning more, and work in hand going forward, with the refined portfolio, I think that will support our aspirations for sustainable growth.”

As part of its two-year transformation program, Downer EDI said it had delivered $180m in cumulative annualised cost improvements – exceeding its $175m target – and was targeting an additional $20m in annual cost savings by the end of June.

The company declared an interim dividend of 10.8c per share, franked at 75 per cent, up from an unfranked 6c payout in the previous corresponding period.

Looking ahead, the company said market conditions were expected to “remain varied, particularly lower Australian transport agency spend and softer economic conditions in New Zealand”.

It’s targeting an underlying NPATA of $265m to $280m for the full year.

In a note to clients, analysts at RBC Capital Markets described it as a “solid” result, despite earnings coming in slightly below market expectations.

“The increase to DOW’s cost-out strategy should be received well,” they said.

“The maiden FY25 NPATA guidance of $265-280m appears manageable.”

Downer EDI shares were trading 1.4 per cent lower on Thursday at $5.48.

Originally published as Transport services in the slow lane but renewables energise Downer EDI