Shares in Downer EDI have soared following an upgrade to the engineering group's full-year profit guidance after it found larger-than-expected cost savings following its Spotless purchase.
Downer, which owns an 87.8 per cent stake of Spotless since finalising its takeover in August, upgraded its net profit guidance to $195 million, from April’s $190 million, after a review identified $25 million of cost savings and “significant” revenue opportunities.
But the company expects Spotless’s profit to be at the bottom end of its previously issued $85 million to $100 million forecast after deciding to record almost $80 million in costs and impairments at the cleaning and catering firm.
The cost hit includes redundancy and transaction costs, a goodwill impairment against Spotless’ laundries business and a write-off of the new Royal Adelaide Hospital.
Downer said its long-term contract at Royal Adelaide Hospital, which is in the first year of a 30-year term, has been underperforming since operations started in September.
It is working to address the issues and expects the work to take several months.
“It is expected that there will be no earnings from this project recognised in the 2018 financial year,” the engineering group said in a statement on Monday.
Despite this, Downer’s total 2018 net profit after tax guidance of $280 million exceeds the market expectation of around $265 million and Citi analysts’ $262 million forecast.
The announcement triggered a jump in Downer’s share price, which had risen 33.5 cents, or five per cent, to $7.07 by 1100 AEDT on Monday.
At 1108 AEDT, Spotless shares were 2.5 cents, or 2.25 per cent, lower at $1.085.
The company said the first four months of Spotless’s “consistent and predictable” trading was broadly in line with its expectations.
Downer plans to refinance Spotless’s debt and performance bonding facilities for next year.
By Simone Ziaziaris