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ASX:DOW
Downer EDI Ltd
Investment Summary
Overall, the fund managers believe that Downer EDI Ltd is in a transitional phase, focusing on becoming a more resilient and capital-light services business. Despite facing challenges such as weak earnings and a downgrade in FY23 guidance, they recognize that the company is making significant strides towards a higher-quality urban services portfolio by exiting lower-margin and higher-risk segments. In their opinion, the recent overhaul of the leadership team and ongoing self-help initiatives, including a cost reduction target of $175m per annum by FY25, will enhance operational efficiency. As a result, they anticipate further improvements in profitability, particularly as the utilities division returns to profitability. The fund managers reaffirm their outlook, suggesting that Downer is on track to meet its target of achieving EBITA margins of at least 4.5% in FY25, which positions the company favorably for exposure to growing annuity-style contracts.
Commentary From The Managers
L1 Capital
31 Aug 2024
$5.74
- Downer EDI Ltd. shares strengthened by 12% over the month following FY24 results announcement.
- Reported an EBITA margin increase to 4.0% in H224, up 100bps from 3.0% in H223.
- The gap towards the 4.5% EBITA margin target is narrowing, driven by a successful turnaround in the utilities division.
- Cost-out program achieving $130m of targeted $175m, positioning Downer for further profitability improvements.
- Expect FY25 to be a transition year, moving towards a more resilient and profitable business model.
- Downer is evolving into a less capital-intensive and lower-risk services provider.
- Exposed to a growing pipeline of high-quality, annuity-style contracts.
L1 Capital
31 Mar 2024
$4.95
- Downer (Long +16%) shares saw an increase over the quarter.
- Targeted cost-out program increased by $75m p.a. to a total of $175m p.a. to be achieved by FY25.
- Utilities division reported a return to profitability during H1 2024.
- Cost-out program and profitability led Downer to reaffirm target EBITA margins of at least 4.5% in FY25.
- Company is exploring noncore divestments and finalising a revised capital allocation strategy.
- Expected transition year in FY24, with positive impacts starting to materialise in H2 2024.
- Renewed leadership at Board and senior management focused on efficiency and simplification.
- Anticipating Downer to evolve into a more resilient, less capital-intensive services business.
- Exposure to a growing pipeline of annuity-style contracts.
L1 Capital
28 Feb 2024
$5.06
- Downer EDI Ltd. shares increased by 18% following announcements of enhanced cost-cutting measures.
- The company is raising its targeted cost-out program by $75m p.a., totaling $175m p.a. by FY25.
- Downer’s utilities division reported a return to profitability in H1 2024.
- The expanded cost-out program has led Downer to reaffirm its target EBITA margins of at least 4.5% in FY25.
- The company is also exploring non-core divestments and finalizing a revised capital allocation strategy.
- Despite expectations of FY24 being a transition year, positive impacts from cost base improvements and the utilities division are anticipated in H2 2024.
- With a renewed leadership team committed to efficiency and simplification, Downer is expected to evolve into a more resilient and less capital-intensive services business.
- The focus is on exposure to growing, annuity-style contracts for future growth.
L1 Capital
30 Nov 2023
$4.24
- Downer EDI Ltd shares strengthened by +12% over the month.
- The company reaffirmed its goal of achieving $100m p.a. cost reductions by the end of FY24.
- Target EBITA margins are set to exceed 4.5% in FY25.
- Sale of RepurposeIT asset resulted in cash proceeds of $85m, showcasing effective portfolio simplification.
- FY24 is expected to be a transition year for Downer, with improvements anticipated in the second half.
- Benefits from the cost-out program and utilities division turnaround are expected to materialize.
- A renewed leadership team at both the Board and senior management levels is focused on self-help measures.
- The company aims to evolve into a more resilient and less capital-intensive services business.
- Focus on growing, annuity-style contracts is a key aspect of their strategy.
L1 Capital
31 July 2023
$4.39
- Downer EDI Ltd shares strengthened by +7% over the month.
- The company is progressing towards a higher quality urban services portfolio.
- A renewed leadership team is in place at both the Board and senior management levels.
- Downer is pursuing additional self-help measures and simplification initiatives.
- There is a cost reduction target of $100m per annum by FY25.
- Further asset sales are anticipated to streamline operations.
- These changes aim to transform Downer into a more resilient, less capital-intensive and lower risk services business.
- The focus is on growing, annuity-style contracts.
L1 Capital
30 June 2023
$4.11
- Downer EDI Ltd. shares rallied over 20% on progress towards a higher-quality urban services portfolio.
- Completion of the sale of the Australian Transport Projects business, a volatile and less profitable division.
- Renewed leadership team at the Board and senior management level supports strategic transition.
- Initiatives for self-help and simplification are actively pursued within the core business.
- Targeting annual cost reductions of $100 million by FY25.
- Further asset sales expected as part of the transformation process.
- Projected outcome is a more resilient, less capital-intensive, and lower risk services business.
- Increased focus on growing, annuity-style contracts for stable revenue streams.
L1 Capital
30 June 2023
$4.11
- Downer (Long +14%) shares increased in June due to progress in transitioning to a higher-quality urban services portfolio.
- Sale of Australian Transport Projects business completed, eliminating a more volatile and less profitable division.
- New leadership team established at both Board and senior management levels.
- Continued pursuit of self-help measures and simplification initiatives within the core business.
- Cost reduction target set at $100m p.a. by FY25.
- Additional asset sales planned to further improve business structure.
- Expectations that these changes will enhance Downer’s profile as a resilient, less capital-intensive services business focused on annuity-style contracts.
- Key detractors from portfolio performance included short positions in high-multiple growth/technology stocks during June.
- Growth stocks outperformed Value stocks significantly.
L1 Capital
31 Mar 2023
$3.43
- Downer EDI Ltd shares fell by 8% after weak first half FY23 earnings results.
- Performance impacted by challenging weather and labour market conditions.
- Below-market cash flow conversion due to working capital build-up.
- Company downgraded its full year FY23 earnings guidance for the second time, following an initial downgrade in December 2022.
- Despite disappointing results, L1 Capital sees medium-term value in Downer.
- Transitioning towards a more selective and higher quality urban services portfolio.
- Exiting lower-margin and higher-risk segments as part of strategic shift.
- Initiatives underway include goals for cost reduction of $100m p.a. by FY25.
- Considerable overhaul of the Board and senior management team, with recent departures of Chairman, CEO, and CFO.
- L1 Capital believes these changes will contribute to Downer becoming a more resilient, capital-light, and lower risk services business.
- Focus on exposure to growing annuity-style contracts.
L1 Capital
28 Feb 2023
$3.16
- Downer (Long -16%) shares declined due to weak first half FY23 earnings affected by challenging weather, labour market issues, and cash flow conversion problems.
- The company downgraded its full year FY23 earnings forecast for the second time, indicating ongoing challenges.
- Despite these disappointments, L1 Capital continues to see value in Downer over the medium term.
- Downer is transitioning towards a more selective and higher quality urban services portfolio by exiting low-margin and higher-risk segments.
- Aiming for a $100m per annum cost reduction
target by FY25, several self-help and simplification initiatives are in progress. - The company has undergone a significant overhaul of its Board and senior management, with key departures including the Chairman, CEO, and CFO.
- L1 Capital believes these leadership changes will help transform Downer into a more resilient, capital-light services business focused on growing, annuity-style contracts.
Please note: The completeness, accuracy or current status of the investments referenced are not guaranteed.
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