Fitch Ratings Outlook Revision

Downer EDI Limited (ASX: $DOW) has had its outlook revised to stable by Fitch Ratings, with the issuer rating affirmed at 'BBB'. The revision reflects Fitch's belief that Downer's identified cost savings of AUD175 million over the next two years will contribute to returning its EBITDA margin to above 5% by the financial year ending June 2025 (FY25). This positive outlook is also attributed to the company's efforts in addressing governance concerns and its ability to secure major contracts with Australian regional governments.

Fitch Ratings Commentary

Fitch Ratings has revised the outlook on Downer EDI Limited's Long-Term Issuer Default Rating (IDR) to Stable from Negative. The affirmation of the issuer rating at 'BBB' also applies to all senior unsecured debt issued or guaranteed by Downer, including debt issued by its subsidiary, Downer Group Finance Pty Limited. Fitch believes that the AUD175 million in cost savings identified by Downer's management will enable the company to return its EBITDA margin to above 5% by FY25. The company has already made good progress in delivering around AUD100 million in annualised EBITDA benefits by FY25, with a further AUD75 million announced at 1HFY24, which it expects to deliver in annualised benefits in FY26.

Summary of Fitch Ratings Report

Fitch's revision of Downer EDI Limited's outlook to stable from negative, with an affirmed issuer rating at 'BBB', reflects the company's efforts in identifying cost savings and addressing governance concerns. The outlook indicates Fitch's belief in Downer's ability to return its EBITDA margin to above 5% by FY25, driven by the identified cost savings. Downer's success in securing major contracts with Australian regional governments and its commitment to balance-sheet strength also contribute to the positive outlook. The company's resilient core business, supported by strong revenue visibility and a focus on delivering strong cash-backed earnings, positions it well for the medium term. Fitch expects Downer to benefit from government prioritization of infrastructure development, presenting major opportunities. The company's approach to balancing shareholder returns and its commitment to balance-sheet strength are expected to lead to an improvement in its free cash flow generation. Overall, Fitch's outlook revision reflects confidence in Downer's strategic reset and its ability to navigate challenges, with a positive trajectory expected for its financial performance and governance structure.