DOW Downer Edi Limited

Embattled Australian engineering group Downer EDI Ltd. (DOW.AU) said Thursday that its chairman will stand down in November as its chief executive of less than three weeks unveiled a 98% slump in net profit.

Chairman Peter Jollie said in a statement that his decision to not stand for re-election as a director at the company's annual meeting on Nov. 3, "reflects the board's recognition that board renewal is appropriate." He said Deputy Chairman Mike Harding is expected to replace him.

The changes come just three weeks after Chief Financial Officer Grant Fenn, a former longstanding Qantas Airways Ltd. executive who only joined the company in October, replaced Geoff Knox to become Downer EDI's third chief executive in less than three years.

While the earnings result was well flagged after cost overruns on its key A$1.9 billion passenger train manufacturing contract for the New South Wales government contributed the bulk of A$260 million in one-off charges announced by the firm in early June, continued difficult trading conditions that saw underlying earnings drop across its two largest and traditionally strongest divisions has Downer EDI expecting a flat result this year.

Even so, Fenn said that after a "poor" result, particularly across its engineering and works divisions, this outlook remained an "aggressive" target.

Fenn also maintained the group has "no current intention of raising equity," despite widespread speculation that the troubled Waratah train project, and high capital expenditure requirements across its expanding contract mining business, would force it to tap investors.

For the year to June 30, Downer EDI's net profit slumped to A$3.0 million from A$189.4 million a year ago, however excluding the one-off charges, its result slightly beat both its guidance and market expectations.

Underlying net profit rose 4.2% to A$197.3 million, ahead of consensus forecasts that centered on A$191.7 million, according to an average forecast of seven analysts on Thomson Reuters.

The company expects this measure to remain flat this year, with a record work-in-hand of over A$20 billion providing a "solid foundation for future growth."

In the last month, Downer EDI has signed contract mining deals with both BHP Billiton Ltd.'s Queensland coal mining joint venture with Mitsubishi Corp. and Fortescue Metals Group Ltd.'s iron ore operations in Western Australia worth around A$5 billion in revenue over the next six years.

Fenn said the performance and outlook for the group's mining and rail divisions, notwithstanding the problems with the Waratah contract, remained strong, with coal and iron ore miners driving demand for locomotives they manufacture.

"At the moment we're in a sort of difficult position, in that our production lines on locomotives are nearing full capacity...and we're working on how we can adjust our lines so we get more capacity," Fenn told analysts at a briefing.

However he said that lower demand across its works division, which develops and maintains road and rail infrastructure in Australia, New Zealand and the U.K., led to a poor result with the division's earnings down 24% and margins contracting sharply.

"We're not seeing anywhere near as much discretionary spend from governments, we've still got contracted maintenance...but it's certainly not the extras, which is the high margin work," he said.

Its engineering division also had a "difficult year," with depressed margins across its business down the east coast of Australia and a number of prospective resource projects delayed in the second half.

Through a complex financing and operational structure, Downer EDI has a 49% stake in the Reliance Rail consortium that is contracted to build, and then maintain for 40 years, 78 new eight-car trains for suburban Sydney in a public private partnership with the New South Wales state government. The trains, which are being manufactured under sub-contract in China, are due to be delivered over three years from late 2010.

Fenn said the maintenance centre for the trains had been completed in June, with the prototype and first train set having undertaken testing on Sydney's rail network this month. He said the company was still on schedule to have the first set operating by the end of 2010 with a further five sets due to enter passenger service by June 2011.

Total revenue rose 1.9% to A$6.06 billion from A$5.94 billion and the company declared a final dividend of 16 cents, the same as a year earlier.

-By Bill Lindsay, Dow Jones Newswires; 61-2-8272-4694; bill.lindsay@dowjones.com

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