More than $400 million blown off Downer after wind farm update
Problems with a wind farm project and a Credit Suisse downgrade have wiped more than $400 million off the value of infrastructure group Downer EDI.
In a new report released on Wednesday, Credit Suisse analysts downgraded the stock from neutral to "underperform" and lowered its price target from $7.40 to $7.10.
The downgrade came less than 24 hours after Downer released a statement to the ASX outlining financial problems at Senvion, its partner in the $380 million first stage of the Murra Warra wind farm project in Victoria. Senvion is majority owned by US-based investment fund Centrebridge.
In mid-afternoon trading Downer shares were down 8.6 per cent to $7.20, knocking about $400 million off the company's value, down to $4.28 billion.
Downer has completed about $100 million of plant works at the wind farm project, about 30 kilometres from Horsham in Victoria.
While 26 of 61 wind turbines have already been erected by Senvion, it has gone into administration in Germany in a potential blow to the project.
In the statement, Downer said: "Work is continuing to progress onsite and Downer has initiated discussions with Senvion's court appointed custodian and other key stakeholders, including Partners Group (the owner of the wind farm), to establish a process for securing delivery of outstanding equipment and completing stage one."
"Downer will be assessing whether there is any potential financial impact on Downer and consequently any impact on its guidance for the 2019 financial year. Senvion Australia is working closely with wind farm owners and contractors to ensure that we can continue to safely deliver and operate wind farms in Australia."
Credit Suisse analysts said Senvion was responsible for "manufacture, transport, erection and commissioning of the turbines", and Downer was responsible for the rest of the works at the wind farm.
"Despite Downer's minor share in the project, it is jointly and severally liable under the contract," Credit Suisse said, adding that Downer had said it had a "substantial bank guarantee from Senvion".
Credit Suisse lowered its post-tax profit estimate for Downer from $350 million to $332 million. Downer has a guidance of $352 million.
"We believe the catalyst for the market update at this point is that Senvion's court appointed custodian may be attempting to offload the cost of completing the project to Downer, and the bank guarantee may be insufficient to cover the liability," Credit Suisse's equity research team wrote. They expect it may cost an extra $20 million.
"We are concerned that Downer may have similar excess risk exposure on other projects," Credit Suisse said.
According to a Bloomberg report in March, Centrebridge purchased Senvion for 1 billion euros in 2015 from Indian firm Suzlon. But, according to Bloomberg, "a succession of profit warnings and worries about Senvion's financial stability have wiped out more than 90 per cent of the value of the Centerbridge funds' majority equity stake."