Shares in Downer EDI have jumped after the engineering group lifted its full-year profit because of larger-than-expected cost savings uncovered following its purchase of Spotless.
Downer, which owns 87.8 per cent of the property services firm after a lengthy takeover struggle, upgraded its net profit guidance to $195 million from April’s $190 million following a review that 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.
The hit includes redundancy and transaction costs, a goodwill impairment against Spotless’ laundries business, and a write-off of business at 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 about $265 million.
Citi analysts had forecast $262 million.
The announcement triggered a jump in Downer’s share price, which rose 34 cents, or 5.1 per cent, to $7.07 on Monday.
Spotless shares were one cent, or 0.9 per cent, lower at $1.10.
Downer said the first four months of Spotless’s “consistent and predictable” trading was broadly in line with its expectations.