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Transfield Offers Disappointing Quarterly Results

Written by on May 30, 2013

Transfield lowered fiscal 2013 underlying net profit after tax (NPAT) guidance to between AUD 62 and AUD 65 million (pre-amortisation and impairments). The downgrade follows the disappointing first-half fiscal 2013 result, with underlying NPAT down 18%, released in February. At the time, Transfield confidently forecast full-year underlying NPAT of between AUD 85 and AUD 90 million. However, the downgrade is even larger than expected and highlights the speed at which operating conditions have deteriorated.

The announcement confirms analyst’s no-moat rating, with the company overwhelmed by volatile market conditions, lacklustre contract execution ability and increased competition. The downgrade also highlights our high uncertainty rating, with the mining activity slowdown, cancellation of resource projects, delays in infrastructure projects and scope reductions in maintenance contract work negatively impacting earnings.

Despite key strategic restructure plans introduced by new CEO Graeme Hunt in late 2012, deteriorating market conditions are continuing to have a major impact on earnings. Analysts are surprised by the swiftness and depth of the slowdown, particularly in operations and maintenance contract work. Transfield is taking immediate steps to offset the contract scope reductions and cancellations by bringing forward and increasing the restructuring and retrenchments, which will cost a further AUD 5.9 million.

Major initiatives include direct integration of Easternwell into the Australia/ New Zealand resource and energy business, centralisation of procurement, reorganisation of operational support and further outsourcing of head office functions. Despite marginally increased contract work in the coal seam gas, oil, defence and telecommunications sectors, investors fear the slowdown in the mining sector may surpass the significant cost-cutting being undertaken by Transfield. During the next year, as the large mining and energy projects near conclusion, further competitive pressure will be placed on contractors as more companies attempt to source work in a declining market.

In first-half fiscal 2013, Transfield’s operating cash flow increased 20% due to stricter working capital controls and lower tax payments. However, net debt increased by 29% to AUD 641 million, with gearing (net debt to net debt plus equity) at a very high 46% and leverage (EBITDA to net debt) at a high 2.9 times.The company’s target range for gearing is 25% to 35% and for leverage of two times. Despite a focus on tightening capital management, Transfield will likely be unable to achieve the targets until the business divestments are complete, targeted for fiscal 2015.

The new CEO and board are in the process of implementing the new strategic focus, reducing geographic diversification, lowering operating cost, divesting non-core businesses, reducing capital expenditure and flattening the management structure. However, exposure to the cyclical resources sector leaves Transfield highly reliant on buoyant mining activity and stable financial markets to ensure the steady flow of mining and energy contract work continues.


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