Downer has established strong relationships with local and state governments that outsource operational and management activities

Business Strategy & Outlook

Downer is a major domestic infrastructure, rail, engineering, and maintenance business. The company is chiefly exposed to the domestic rail, water, road, and telecommunications sectors. The future of Downer is focused on urban services, with mining and high-risk construction businesses sold down. Downer does not have a moat despite position, scale, and strong customer relationships. Contracting is a difficult industry in which to establish a moat and Downer in the past decade underperformed from an operational and financial perspective as a result of miscalculating contract risk, poor project management, and unsatisfactory project execution. Downer’s mining operation contributed an approximate 15% share of group EBIT, down from 45% at the peak of the mining boom. It was an asset-heavy business undertaking only a small number of long-term large-scale open-cut mining service contracts. The business faced increasing competition and cyclical demand, being highly dependent on the expenditure plans of major mining and energy companies.

A large-scale network of facilities affords it a dominant position in service and maintenance of locomotives and wagons. The rail business is highly leveraged to both the mining sector and state government public transport expenditure. EBIT contribution from Downer’s engineering, construction, and maintenance, or EC&M, segment has fallen from 35% of group total to approximately 10%. The utilities segment comprises 15%-20% of Downer’s EBIT. Downer bought the majority 88% of Spotless Group in 2017 under an AUD 1.3 billion takeover and the balance in December 2020. Spotless fits with Downer’s diversification drive away from mining services.

Financial Strengths

Downer is now in good financial health. Net debt at June 2022 was AUD 623 million, down from AUD 1.5 billion levels just two years ago, and current 22% gearing and net debt/EBITDA of 1.1 excluding operating leases are more than conservative. Including operating leases, net debt/EBITDA is 1.6 and well below Downer’s 2.0-2.5 target range. The balance sheet is to be in net cash before decade’s end, flagged potential for incremental Urban Services acquisitions notwithstanding. Downer has set up a more capital-light business model for the future, with an emphasis on urban services. It’s

interesting to note that 65% of group fiscal 2020 capital expenditure went on mining and laundries. It’s clear why these segments were sold. Success on this front has enhanced the balance sheet.

Bulls Say

Downer is emerging from a period of turmoil and transformation. Restructurings, write-downs, major project losses, and contract disappointments of the past appear to be over.
Since July 2010, maintenance/infrastructure contract wins and introduction of a new project management framework have helped to re-establish Downer’s reputation.
Downer’s growing revenue streams from maintenance contracts in the social infrastructure, transport, telecommunications, and government sectors are helping to increasingly insulate the company from the downturn in mining work.

Company Description

Downer operates engineering, construction, and maintenance; transport; technology and communications; utilities; and rail units. But the future of Downer is focused on urban services, and mining and high-risk construction businesses have been sold. The engineering, construction, and maintenance business had exposure to mining and energy projects through consulting services. The mining division had provided contracted mining services. The rail division services and maintains passenger rolling stock, including locomotives and wagons.

(Source: Morningstar)

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