Mining services firm Downer (ASX:DOW) has a more positive financial outlook, according to Fitch Ratings, following a “strategic reset” that includes a significant cost savings target to help improve its bottom line.
Ratings agency Fitch has revised its outlook from negative to stable and reaffirmed its ‘BBB’ rating, which signals good prospects for ongoing financial viability.
Fitch believes in Downer’s ability to deliver $175 million worth of cost savings over the next two years to lift its earnings before interest, taxes, depreciation and amortisation margin above 5% by the end of the 2025 financial year.
The decision to revise the outlook also follows a ruling by the New South Wales Independent Commission Against Corruption (ICAC) not to take further action against Downer for allegations of corruption by several former employees.
ICAC began a public inquiry in March 2023 into the conduct of former Downer employees and a Sydney council, as well as actions the company took to address control weaknesses after discovering accounting irregularities.
However, no findings were made against Downer and Fitch says it believes this reduces the contagion risks related to the company’s governance.
With respect to the cost cuts, Fitch says Downer has already made good progress towards achieving around $100 million in annualised EBITDA benefits by FY25.
A further $75 million in measures was announced in the first half of FY24, which Fitch expects will be realised in FY26.
Downer, which has a market capitalisation of over $3 billion, has secured over $5.5 billion worth of new contracts across its business sectors, which includes contract mining and mineral processing.
The company has worked with BHP (ASX:BHP) for over 50 years, supplying maintenance, shutdown services and sustaining capital works to projects across the Western Australian Iron Ore, Nickel West and Olympic Dam assets.
Fitch says the company’s adjusted EBITDA margin stabilised at just below 4% in 1H FY24 as a result of underperforming contracts in its utilities business, difficult weather conditions and supply chain issues that dragged down profitability since FY22.
“We expect Downer’s margin will improve in 2H FY24 as the underperforming contracts begin to complete, initial cost reduction measures take effect, volumes recover and labour costs continue to stabilise.”
However, the ratings agency views Downer’s free cash flow generation as weak compared to its peers given it has reported negative free cash flow for three of the past four years.
Fitch expects free cash flow generation to be neutral until at least FY27.
Write to Angela East at Mining.com.au
Images: BHP & Downer
