cred suisse prices $350m downer raising at $3

Credit Suisse prices $350m Downer raising at $3 a share

CREDIT Suisse has priced a Downer EDI raising as more analysts believe the company is headed towards a dilutive equity issue.
Credit Suisse analyst Chris Counihan today put a price on a $350 million injection, and said he expects the raising to be done at $3 a share within the next 12 months, which could be 27 per cent dilutive to the banks full-year 2011 forecasts.

Credit Suisse now expects full-year 2011 net profit after tax to come in at $218.7m, down from $221.1m.

By early afternoon, Downer EDI was down a further 13 cents, or 3.48 per cent, at $3.61 after yesterdays 6 per cent-plus slide. The stock is now down about 25 per cent for the month.

Downer yesterday clarified it has $600m in cash and facilities after the company denied a report that queried whether its Works Australia division could pay creditors.

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But Counihan said Credit Suisses greater concern is Downers balance-sheet flexibility, after the recent $190m Reliance Rail writedown and its focus on earnings growth from capital-intensive contracts.

Analysts have also worried about Downers ability to offset its rising cost of debt from a recent credit rating downgrade by ratings agency Fitch.

We believe Downer will require equity funding to pursue any material growth aspirations, said Counihan.

If Downer are successful in tendering further contract mining opportunities, we believe a significant upfront capital expenditure requirement to service these contracts is likely (up to $350m).

In the absence of a dilutive equity raising, we believe organic earnings growth across all businesses will prove challenging.

Credit Suisse slashed its target price to $4.90 a share from $5.75, but maintained its outperform rating.

From a credit perspective, National Australia Banks research team today agreed an equity raising was possibility.

Downer has a large credibility-rebuilding task ahead of it - one that was not helped by yesterdays partly contradictory ASX announcements, NAB said.

Much needs to be done before the large discount that currently lies over Downers credit rating is removed, and this will likely restrict any move in its rating back to BBB.

Goldman Sachs JBWere and Macquarie have also said an equity raising could be on the way.