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Article: Time for Reliance Rail to live up to its name

Started by ozbob, January 26, 2011, 13:48:14 PM

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ozbob

From the Brisbanetimes click here!

Time for Reliance Rail to live up to its name

QuoteTime for Reliance Rail to live up to its name
January 26, 2011

Downer EDI's credibility, and shares, will take a battering tomorrow when shareholders are hit with another $150 million-plus provision caused by technical hitches relating to the delivery of trains in its $1.9 billion Waratah rail project with the NSW Government.

Delivery will now be delayed even further, beyond this month, and trading in the company's shares were halted on Monday.

As the financial implications are still being assessed, including estimating how many months the trains will be delayed and the size of the provision, shareholders will have to wait until Downer's financial results are made public next month to see whether an equity raising is likely.

Against this backdrop, banks and politics have entered the mix, trying to pressure Downer to put in more money and take on more risk. It is understood the company is working closely with the investment bank UBS to help with this strategy.

An equity issue will hinge on whether the international ratings agency Fitch downgrades Downer's credit rating. Fitch was briefed by senior executives on Monday night, and the company is waiting on its decision. If there is a downgrade, Downer will have little option but to raise capital, probably when its profit results are published.

The company appointed a new senior executive, Ross Spicer, last month to take control of the controversial rail project. He has been working directly with the Downer boss Grant Fenn to sort out the project. He has worked in the rail industry in Britain for more than 20 years in companies including Eurostar and more recently Virgin Trains.

His appointment, and this latest setback, undoubtedly have set the clock ticking for Peter Reichler, who was chief financial officer from 2005 before being appointed chief executive of joint ventures (including the Waratah project) in 2009. Fenn is busy working out the technical issues and the impact these will have not only on the delivery of the first train set - there has been a series of delays - but also the following 77 trains. Provisioning is expected to exceed $150 million, which follows a $190 million provision in June.

On December 7 Fitch put out a note confirming its rating for the engineering and rail group after Downer put out a notice to the ASX warning the first set would be delivered to RailCorp this month, rather than in mid-December. Fitch is now assessing the impact on the group of the latest debacle.

Two analysts with the Commonwealth Bank, Ben Brownette and Steve Shoobert, do not believe Fitch will downgrade Downer. They believe any provisioning would be treated as non-recurring and so Fitch would strip it out of earnings.

Almost needless to say, Brownette and Shoobert believe Fitch has been too generous in its treatment of Downer and note that its method of assessing Downer is being ignored in bond markets based on the bond spreads.

"In our view, this treatment by Fitch is rather generous, as the provision relates to several years of earnings, and the contract has the potential to be costly out until 2043 via the severe revenue abatement regime,'' they say.

''While our view is that this expense should therefore be considered as an operating item (and we await to learn whether it results in a technical breach of its banking covenants), Fitch has not agreed. Nonetheless, Fitch may indeed adjust this view, which might lead to a ratings downgrade."

The news comes after shareholders suffered a horrible 2010, culminating in a 98 per cent fall in net profit to $3 million, after Downer announced in June that it would suffer $190 million in blowouts on the multibillion-dollar Waratah project and $70 million in other write-downs.

Disappointments, contracts gone bad, profit downgrades, credibility issues and a revolving door for chief executives, directors and senior executives have been recurring themes for the group, leaving shareholders out of pocket and angry.

The last chief executive to get the bullet was Geoff Knox last year. Before him, the interim chief executive Bruce Waldron left in 2007 and before him Stephen Gillies resigned in August 2006 following huge company profit downgrades in 2006-07, partly caused by a long-running dispute with Iluka Resources over Downer's $150 million claims in cost overruns in Iluka's mineral sands project.

Since Fenn took the top job in August after a short stint as chief financial officer, he has insisted the trains would be delivered on time. He even set part of his salary package on delivery of the trains on time. This has gone up in smoke.

The setback is very damaging for Fenn's and Downer's credibility.

The company cannot afford any more stuff-ups or delays.

Fenn will need to detail to the market a revised production schedule and project costs - and this time make sure there are no more issues with a project that has dogged the company since it was signed.

Downer has a 49 per cent stake in the (unfortunately named) Reliance Rail consortium, which has a 40-year contract to build and maintain the 78 trains for Sydney in a public-private partnership with the state government.

When Fenn took the top job he sent signals to the market that he was on a mission to fix Downer. He promised $250 million in cost-cutting to create efficiencies, an overhaul of management reporting lines, a commitment to deliver the first train by December 31 and a focus on risk management procedures. He will need to pull a rabbit out of the hat to fix this mess.

Tomorrow's announcement will signal the end of his honeymoon. He will have to prove his worth or face a similar fate to his predecessors.
Half baked projects, have long term consequences ...
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ozbob

From the Brisbanetimes click here!

Train wreck for investors

QuoteTrain wreck for investors
January 27, 2011 - 12:30PM

Downer EDI shareholders have $250 million worth of reasons to feel sorry for themselves after the company fessed up to new complications in its $1.9 billion Waratah train project, and refused to rule out an equity issue.

Not surprisingly, Downer shares, when they came out of a trading halt this morning, dived as much as 25 per cent to a low of $3.40, as investors dumped a company that has been a perennial offender when it comes to bad news.

The latest bad news of a $250 million provision on its train project with the NSW government follows a $190 million provision on the project last June. All up, the project loss is a whopping $440 million.
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For Downer boss Grant Fenn it must have been a tough outing in terms of trying to preserve his credibility, particularly after his statements in December about the timing of the delivery of the first train.

While he told the market that underlying earnings before interest and tax, excluding the Waratah project for the six months to December 31, would be $132 million, this figure is meaningless without factoring in the Waratah project. The market will have to wait until February 15 to get the statutory accounts and a full year outlook.

What wasn't told to the market back then was that an expert had been appointed to take control of the project, Ross Spicer, who conducted a review. It is the findings of that review that uncovered a new mess.

Not surprisingly, Spicer will report directly to Fenn, rather than Peter Reichler, who was a board member of Reliance Rail - the consortium responsible for delivering the trains - until December and until recently was in charge of the project via his role as chief executive of joint ventures, which included the Waratah project.

The briefing at 10am, prompted by the review, made it clear that the company has had issues from the start with aggressive timetables for delivery and not enough of the right people with the right experience running the project.

Fenn has now pushed them out another few months to June for the first delivery, but with so many promises over the past few years some investors have lost confidence in the latest promises.

Fenn didn't rule out a capital raising. He said if there was to be one, it would be fair to all shareholders. An equity issue hinges on a credit rating by Fitch.

It appears that Fitch will put it on a negative credit rating watch and if that changes once it has a proper look at its accounts, then an equity issue will be inevitable.
Half baked projects, have long term consequences ...
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