Downer EDI (ASX:DOW) reported first-half results marked by EBITDA growth, margin expansion and strong cash generation, even as revenue declined due to softer transport agency spend, a telco downturn and the timing of water contract ramp-ups.
Profitability improves as margins reach decade-high
The company said underlying EBITDA increased 11% to AUD 227 million, supported by higher earnings across all three operating segments and lower corporate costs. Management highlighted “normalized” cash conversion above 90%, with Mel (CFO) citing 90.5% cash conversion for the half, in line with a target of greater than 90%.
Statutory NPAT increased 30% to AUD 98 million, while underlying NPATA rose 7% to AUD 136 million. Depreciation and amortization declined 13% to AUD 142 million, which the company attributed to optimization efforts including property and fleet reductions and IT rationalization.
Revenue down as quality-over-volume strategy continues
Excluding divested businesses, first-half underlying revenue was down 3.6% compared with first-half 2025 pro forma, which management said was broadly aligned with expectations. The CFO also noted pro forma revenue declined 4.9% versus pro forma first-half 2025, and 6.9% on a statutory basis.
Management attributed the revenue decline primarily to lower volumes in transport and energy and utilities, partially offset by growth in facilities. Downer reiterated that it has been reshaping its portfolio over the past three years, exiting “lower margin, higher risk and non-core businesses,” and said the reset is largely complete at the end of this financial year.
Key items management cited in the revenue bridge included:
- Transport: Softer Australian transport agency spend affected roads, while New Zealand revenue was impacted by “risk guardrails” applied in the Hawkins business and planned completion of major projects including Auckland’s City Rail Link and Victoria’s High Capacity Metro Trains project.
- Energy and utilities: Strong growth in power projects was offset by a previously signaled decline in telco, along with the timing of new water contracts expected to generate planned volumes in the second half.
- Foreign exchange: Management said the weaker New Zealand dollar reduced translated revenue by approximately AUD 41 million.
Work in hand rises to AUD 38.2 billion
Downer said work in hand increased 8.9% to AUD 38.2 billion, driven by energy and utilities (up 21.6%) and facilities (up 20%) on new wins, renewals and extensions across power, water, energy, industrial, defense and housing. Transport work in hand declined modestly, although management noted the transport figure excludes about AUD 1 billion of preferred bidder positions, including New Zealand state highway maintenance contracts announced in December and a Sydney motorway network maintenance contract that the company expects to sign shortly.
Management described the order book as long-dated and diversified, with more than 90% government-related and around 90% services. Responding to analyst questions, the company said work-in-hand wins are mobilizing and are expected to begin contributing in the second half and into 2027.
Segment performance: transport, energy and utilities, facilities
Transport EBITDA increased 12.4% to AUD 129 million, with margin up 80 basis points to 5.3%. In Australia, the Queensland Train Manufacturing Program contributed to earnings; management said the prototype train is being manufactured in Korea, with testing expected to commence in Australia in late 2026 or early 2027, and the Torbanlea facility nearing completion to enable local manufacturing next year. Road Services faced variable transport agency spend, though volumes improved in Victoria, South Australia and Western Australia, offset by lower activity in New South Wales and Queensland. Management said it expects a stronger second half, driven by seasonality and improved market dynamics.
In New Zealand, Hawkins maintained profitability despite lower revenue. Downer highlighted being named contractor for four NZTA state highway maintenance regions in December, while transitioning out of two smaller South Island regions ahead of new contracts commencing in May. The company also announced the appointment of Doug Moss to lead the transport and infrastructure business, starting in April.
Energy and utilities EBITDA rose 18% to AUD 58 million, with margin up 110 basis points to 4.4%. Management cited strong performance in power projects, including successful delivery of major transmission lines and substations, and improved activity in energy and industrial. The telco business declined as expected, following completion of the main construction phase for the NBN and consolidation of delivery partners by major carriers, prompting a reset of the cost base. Water’s first-half contribution was affected by timing, but management expects a stronger second half as contracts ramp up.
Work in hand for energy and utilities increased 21.6% to AUD 6.2 billion. Power Projects secured about AUD 700 million of new work, including panel appointments with Powerlink and TransGrid and orders related to battery energy storage systems and renewable grid connections.
Facilities revenue increased 2.4% to AUD 1.1 billion, while EBITDA rose 9.4% to AUD 78 million and margin expanded to 7%. Management attributed growth to government and facilities management, including mobilization of contracts for Homes New South Wales and the Department of Home Affairs. The Defence EMOS contract performed well in its final months and concluded at the end of January, transitioning to the new Property and Asset Services contract (PAS) from February 2026, where margins will reset lower. Downer said the demobilization and mobilization across three defense regions was complex but executed successfully.
Cash, balance sheet, capital returns and outlook
Operating cash flow was AUD 312 million, and free cash flow was AUD 105 million for the half. Gross CapEx was AUD 56 million, and the company said it expects CapEx to increase in the second half, reiterating a FY 2026 gross CapEx expectation of around AUD 170 million.
Downer said its balance sheet strengthened further, with net debt to EBITDA of 0.8x, supported by divestment proceeds from the sale of its remaining interest in Keolis Downer, completed in December. Net debt fell 46% year-on-year to AUD 242 million at December. The company also cited liquidity of AUD 2.3 billion and bonding capacity of around AUD 700 million.
The interim dividend was set at AUD 0.129 per share, 100% franked, representing a 19% increase on first half 2025 and a payout ratio of 65%. The company also referenced its on-market share buyback of up to 5% of issued capital, with AUD 64 million spent in the first half, and said it remains committed to completing the program through the second half into early 2027.
For FY 2026, management guided to underlying earnings and EBITDA margin improvement and NPATA of AUD 295 million to AUD 315 million, assuming no material changes in economic conditions or market demand and no material weather disruptions. Downer said it expects underlying revenue for the full year to be slightly lower than FY 2025 pro forma revenue, with a “little bit better” revenue profile anticipated in the second half as water ramps up and road activity improves.
During the call, management also noted a workplace fatality in New Zealand following a vehicle-related incident in January, expressing condolences to the employee’s family and colleagues.
About Downer EDI (ASX:DOW)
Downer EDI Limited operates as an integrated facilities management services provider in Australia and New Zealand. It operates through Transport, Utilities, and Facilities segments. The company offers road and transport infrastructure services including road network management, routine road maintenance, asset management systems, spray sealing, asphalt laying, and manufacturing and supply of bitumen-based products, and asphalt products, as well as provides landfill diversion solutions and intelligent transport systems; and design and construction of light rail and heavy rail networks, signaling, track and station works, rail safety technology, and bridges.
