Downer EDI (ASX: DOW) cuts guidance for FY23 as half-year profit plunges; stock tumbles 24%

Highlights:

• Downer EDI Limited (ASX:DOW) released its six-month fiscal results and an update on utilities contract misreporting.
• The company’s post-tax earnings in the utilities division was overstated between April 2020-June 2022.
• DOW has cut down its earlier given FY2023 underlying guidance of NPATA to the current AU$170 million to AU$190 million.

Integrated services provider in the ANZ region, Downer EDI Limited (ASX:DOW) released its six-month financial results ended 31 December last year on Monday, 27 February 2023, along with an update on earnings misreporting in its utilities segment. After these updates, DOW stock started falling, ending today's trade 23.74% lower at AU$3.020. The company also downgraded its earnings guidance for the current financial.

Downer’s utilities contract

In December last year, Downer had informed about misreporting of revenue and WIP (work in progress) in one of its maintenance contracts in the utilities division. Today, the company said that its investigation into this misreporting has been completed, and the misreporting was limited to that particular contract only.

Effect of contract misreporting

The utilities contract earnings misreporting since inception had a poor underlying performance as its outcome. The management team of the utilities responsible for this contract has now been replaced.

The misapplication of the company’s revenue recognition policy by false assumptions that work orders were concluded every month and costs incurred surplus to the billable amount led to the misreporting of the revenue.

Between April 2020 and June 2022, post-tax earnings were overstated by AU$22.2 million (AU$1.7 million pertains to the fiscal year 2020, AU$8.8 million pertains to FY21, and AU$11.7 million pertains to FY22).

Downer further informed that the utilities management team, which was responsible for the misreporting, has been replaced.

Downer’s interim results

DOW also released its half-yearly results on Monday and mentioned that during the reported period, the total revenue and other income from ordinary activities were 2.5% higher at AU$5,710.8 million from AU$5,570.3 million YoY.

Despite higher revenues, EBITA of the company was negatively impacted because of wet weather conditions, labour shortages and project losses in utilities division. As a result, its EBITA went down by 21.3% to AU$142.9 million. NPAT slipped 20.3% to A $68.1 million from AU$85.4 million in pcp.

Basic earnings per share decreased 21.8% to 9.3 cents versus 11.9 cents in pcp.

Downer had a liquidity of AU$1.6 billion, including cash balances standing at AU$450.4 million. Also, it had undrawn committed debt facilities of AU$1.2 billion.

In the first half period, the company bought 3.85 million securities as a buyback programme valued at AU$17.8 million.

Downer’s interim dividend

The company has decided to make an unfranked dividend distribution of AU 5 cps on 11 April this year. They have also decided to pay 100% imputed dividend distribution on the ROADS security (reset on 15 June last year). It has an 8.14% yield a year, to be paid on a quarterly basis in arrears. It will be paid with the next payment, which is scheduled for 15 March this year.

The ex-date of the interim distribution is 10 March, and the record date for the same is 13 March this year.

Downer’s FY2023 outlook

The company has cut down its December last year’s guidance for FY2023 underlying NPATA, which was between AU$210 million to AU$230 million.

It now anticipates FY23 NPATA to fall in the range of AU$170 million to AU$190 million, provided there are no disruptions like a pandemic, weather, labour scarcities, etc.

Further, the company added that utilities contract losses are not onerous, but additional losses will influence the second half of FY2023 till the time contract is reset and the recovery strategy comes into effect (after tax, AU$12 million).

The effect of latest natural calamities, like storms and floods in the NZ and North Island regions, have materially affected present operations. Though, the company anticipates it to present prospects in FY2024. However, the pipeline of 2HFY23 has been influenced (after tax, AU$8 million).