The Downer EDI Ltd (ASX: DOW) share price has sunk more than 20% after announcing misreporting in its accounts.
Downer describes itself as a leading provider of integrated services in Australia and New Zealand. The business works with customers to design, build and sustain assets, infrastructure and facilities.
Accounting pain
The ASX share said that it identified accounting irregularities in its Australian utilities business after historical misreporting of revenue and work in progress in one of Downer’s maintenance contracts.
A detailed investigation is ongoing, so details are “preliminary”, but the adjustments seem to be between September 2019 to November 2022.
Based on current information, the estimated historical overstatement of pre-tax earnings was “in the order of $30 million to $40 million” at the end of November 2022, accumulated across FY20, FY21, FY22 and FY23.
Any potential ongoing impact on earnings is “still being determined”.
The company is moving quickly to address the immediate issues and ensure that the financial and management capability within the business is strengthened.
Trading update
In August, the ASX share had said it was expecting 10% to 20% growth in FY23’s underlying net profit (NPATA), assuming no unforeseen major impacts. Investor expectations about profit can have a sizeable impact on the Downer share price.
However, difficult weather conditions and elevated costs to serve issues have plagued the first quarter, particularly on Australia’s eastern states and New Zealand, with very few businesses unaffected.
After analysing its trading for October and November, it’s “clear that the guidance is now unlikely to be met”.
Management said that its road services and utilities businesses have been heavily impacted by weather and all businesses have been battling staff shortages and supply chain issues. The issues are “dissipating”, but not in time to help 2023 earnings.
Excluding the impact of accounting irregularities outlined above, the company expects FY23 underlying NPATA to be between $210 million to $230 million.
Final thoughts on the Downer share price
A problem with the accounting and a weak trading update is a double whammy for shareholders. Time will tell how much damage is done to FY23 earnings.
The last time the Downer share price was this low was during April 2020 – just after the worst of the COVID crash. It’s hard for me to say whether this is an opportunity or trying to catch a falling knife.
