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Delays put Downer on a downer
Jacob Saulwick
January 28, 2011

DOWNER EDI will come under increased pressure to tap shareholders for more capital after making a humiliating $250 million provision for its Waratah train project, which remains bedevilled by risks.

Shares in the engineering and logistics company crashed 20 per cent yesterday after Downer admitted that it faced another six months of delays before it could deliver a train to the New South Wales government; had been too aggressive in its initial production schedule; and needed to hire more staff with experience on major train projects.

On preliminary figures, the company now expects a loss of about $118 million for the six months to the end of December. Stripping out the provision, Downer expects underlying earnings before interest and tax of $132 million for the half-year.
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Chief executive Grant Fenn said the company remained within its banking covenants and had ample working liquidity. But he conceded there would be speculation about capital raisings.

''There will be a lot of conjecture about whether we need to raise equity. What I have said is that in the future, if we were to raise equity, and I'm not saying we will ? we would do it in such a way it would be fair to the shareholders,'' he told BusinessDay.

This meant any capital raising would be a renounceable rights issue allowing existing shareholders to get first preference, Mr Fenn said.

The scale of Downer's provision for the Waratah project - $250 million, on top of $190 million booked last June - surprised analysts and shareholders.

The largest element in the provision, $114 million for extra labour and project management costs, comes through Downer having to revise the pace of its manufacturing process. As recently as last month Downer was hoping to speed up the construction and delivery of most of the 78 trains it is building for the NSW government, even if the first trains it delivered were overdue.

But, after a review of the project by former RailCorp consultant Ross Spicer, Downer now says that aim was over-ambitious.

Mr Spicer will now become project manager, reporting directly to Mr Fenn.

Mr Spicer will initially try to smooth the manufacturing process in China, where the trains are being built by a subcontractor. But then extra work will be needed in Australia on trains that already have been built. ''What we are highlighting today is that as we fix those issues around manufacturability there will be additional rework in Australia that will be in part a cause for the increase in the provisions,'' Mr Fenn said.

Ratings agency Fitch placed Downer on negative credit watch yesterday. Fitch said the watch ''derives mostly from Fitch's concerns over Downer management's ability to execute complex projects, and the potential for related negative impacts in the future from this latest incremental loss of management credibility, such as winning new contracts and/or obtaining new financing''.