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(The following statement was released by the rating agency) SYDNEY, February 03 (Fitch) Fitch Ratings says that engineering services group Downer EDI Limited's (Downer, 'BBB'/Stable) results for the first half of the fiscal year ending June 2014 underscore the benefits of its strategy to bolster its competitive advantage via joint ventures. Downer's more diversified operations will support its rating in an environment of overcapacity and rising competition. Downer's 1HFY14 earnings mix indicates a shift away from cyclical earnings sources to more defensive sources as its customers in the resources sector increase insourcing and focus on cutting operating costs. In 1HFY12 less than 30% of group EBIT was attributed to Downer Infrastructure, but in 1HFY14 nearly half of group EBIT was derived from its infrastructure arm. The defensive nature of Downer's operating risk profile is highlighted by its ability to win, through its joint venture strategy, infrastructure projects in areas such as roading and road maintenance. It no longer relies mainly on competing in niche services such as electrical and instrumentation. Downer's stronger balance sheet is supportive of its ability to better manage its project risk. Falling resource-related capex, in particular the completion or near completion of major LNG projects on Australia's east coast, have led to surplus capacity in the engineering services industry. The overcapacity phase of the contracting cycle is usually when contractors are tempted to fill their project pipelines with risky revenue streams that may translate into future losses and cash leakages. Downer has addressed this industry trend by increasing efficiency gains, deleveraging its balance sheet and developing a strong cross-disciplinary risk management framework. Fitch expects Downer's margins to fall in 2015 amidst rising revenues, but for cash flow to rise. Cost reductions in the form of efficiency programs such as Fit 4 Business have contributed to the long-run drop in Downer's fixed cost base. However, the sharp half on half increase in statutory EBIT margin (1H14: 4.25% ,1H13: 3.7%) is also the result of the near completion phase of major, by revenue, construction contracts such as the Waratah Train Project (WTP), and large scale mineral resources projects. These will only be replaced in FY15. Profit recognition for construction contracts is back-ended with profitable projects only recognised at cost in the initial stages. Moreover, a previously major revenue contributor, the WTP, has no associated profit attached and its near completion will eliminate its marginless revenue going forward. Contacts: Johann Kenny, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd., Level 15, 77 King Street, Sydney NSW 2000 Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com. Additional information is available atwww.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.