Downer EDI Posts 70% NPATA Surge as Turnaround Gains Momentum

Strong Financial Performance Amid Transformation

Downer EDI Limited (ASX:DOW) has delivered a compelling set of results for the six months ended 31 December 2024, signaling that its turnaround strategy is firmly on track. The company reported a 4.7% increase in statutory net profit after tax (NPAT) to $75.5 million, alongside a remarkable 70% uplift in pro forma net profit after tax and amortisation (NPATA) to $127.3 million. These gains were underpinned by a 37.1% rise in pro forma EBITA to $204.4 million and a 1.1 percentage point improvement in EBITA margin to 3.7%.

CEO Peter Tompkins highlighted the resilience of Downer's diversified portfolio and the effectiveness of its transformation program, which has now delivered cumulative annualised gross cost savings of $180 million, surpassing the initial $175 million target. The company is on course to achieve $200 million in cost reductions by mid-2025, reinforcing its commitment to operational efficiency and margin expansion.

Segmental Growth and Strategic Portfolio Simplification

Segment performance was robust across the board. The Transport segment's pro forma EBITA increased by 31.9%, driven by strong profitability in New Zealand Transport & Infrastructure and Rail & Transit Systems, supported by overhead cost reductions. The Energy & Utilities segment saw a 38.8% EBITA increase, buoyed by telecommunications growth and the stabilization of previously low-margin contracts. Facilities also contributed positively with a 5.6% EBITA rise, benefiting from improved contract management and operating model enhancements.

Revenue declined by 5.2% to $5.5 billion, reflecting a deliberate focus on revenue quality and risk management, as well as softer market conditions in Australia and New Zealand. Work-in-hand decreased slightly by 2.9% to $37.4 billion, influenced by project completions and selective tendering. However, Downer maintains a strong win rate for new contracts, particularly in Defence EMOS, power, telecommunications, and road maintenance, positioning the company well for the second half of FY25.

Balance Sheet Strength and Dividend Policy

Downer’s balance sheet showed marked improvement, with net debt to EBITDA reducing to 1.3 times from 1.4 times at the previous half-year. Operating cash flow rose by 30.9% to $220.1 million, delivering a normalized cash conversion rate of 94.2%, a significant improvement over the prior period. This enhanced financial flexibility supports ongoing capital management initiatives.

The Board declared an interim dividend of 10.8 cents per share, 75% franked, reflecting a payout ratio of 60%. The dividend policy remains cautious with the Dividend Reinvestment Plan suspended, signaling prudent capital allocation amid ongoing transformation.

Outlook and Market Conditions

Looking ahead, Downer expects FY25 underlying NPATA to range between $265 million and $280 million, assuming stable economic conditions and no significant weather disruptions. The company remains focused on building a high-quality order book with disciplined risk management, while anticipating continued margin improvements across its segments. However, it acknowledges that market conditions will remain mixed, with subdued Australian transport agency spending and softer New Zealand economic activity.

Downer’s ongoing portfolio simplification includes divestments of non-core businesses such as its New Zealand Catering and Laundries interests, and negotiations to divest its 49% stake in Keolis Downer Pty Ltd. These moves aim to sharpen strategic focus and unlock shareholder value.