Downer EDI Limited (ASX: DOW) has fallen over 22% upon market open, after finishing last trading session at $8.76 per share and opening today at $6.80. This represents the worst performer in the ASX 200 today. The drop comes after an ASX announcement that they have revised their FY20 NPAT guidance down to $300 million. The contract provider offers a number of reasons for the downgrade. Firstly, project underperformance in engineering, construction and maintenance (by $43 million pre-tax). Secondly, lower revenue in engineering, construction and maintenance for the remainder of the financial year (by $20 million pre-tax). Also, unbudgeted restructure costs in engineering, construction and maintenance (by $10 million). And lastly, delayed project commencement in mining ($12 million pre-tax).
Downer outlined in their trading update that the costs occurred during December and January materially exceeded the company’s estimates. As such, the share price drop represents the inherent risk of investing in contract-based companies where assumed costs can quite easily blow out.
Downer Group is an integrated services company that designs, builds and sustains assets, infrastructure and facilities. Their primary markets are Australia and New Zealand, but the company also operates throughout the Asia-Pacific region, South America and Southern Africa.
However, its not all bad for Downer, the company also announced this morning that it has been awarded a five-year contract valued at approximately $600 million, to provide mining and related services to the Meandu Mine, owned by Stanwell Corporation Limited. The contract is to comment 1 July 2020 and will consist of full mining services, including operation of the Coal Handling and Preparation Plant.