Feb 12, 2020

Downer EDI backs out of solar and coal construction

Downer EDI backs out of solar and coal construction

Downer EDI will no longer tender for fixed-price major construction contracts in the solar, coal or iron ore sectors.

Chief executive officer Grant Fenn was commenting after construction losses weighed down the group’s financial performance in the first half of financial year 2020.

The company reported an interim net profit of $91.4 million and had reduced its full year earnings guidance by $65 million, after tax.

“Unfortunately, the loss-making construction projects that are now either complete, or almost complete, predate a number of changes the group has made to its risk and contracting limits over the past 18 months,” Mr Fenn said.

“During this period, we’ve been strictly limiting the risk in our construction portfolio, in terms of the type of work, price, terms and conditions, and this has led to a material reduction in construction work in hand. “

Eighty-nine per cent of Downer’s work now lies in its urban services businesses: transport, utilities and facilities. Mr Fenn said construction work totaled just $5.7 billion or 12 per cent, of the group’s $46 billion of work in hand.

Mr Fenn said the engineering and construction business would no longer tender for hard dollar construction contracts in the solar, coal, iron ore and industrial S&P and E&I sectors.

The company’s decision to withdraw from construction of large-scale solar farms was disappointing but inevitable, given that the market had almost evaporated over the past 12 months, he said.

Developers, bankers and contractors had all struggled to come to terms with the risk of largescale loss factors, grid stability problems, connection problems and equipment performance issues.

The Ross River solar farm at Townsville and Clare solar farm in the Burdekin region are among the projects where Downer has acted as Engineering, Procurement and Construction contractor.

Coal project construction ‘subdued’

Mr Fenn said traditional major construction markets in coal and iron ore were also subdued.

“With little happening in coal and iron ore, projects’ timeframes are extending,” he said.

“Downer’s traditional competitive strength in E&I (electrical and instrumentation) has been diminished somewhat as most project awards are now multi-discipline, driving more commoditised price and contract terms and conditions. It’s been very hard to make money consistently.”

Downer has also announced its is exiting its mining business and says a number of bids were received last week.

The bids were being assessed along with other exit alternatives including a demerger, it said in an ASX update.

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