Fitch: Budget Creates Gap Between Australian Engineering Firms

Wed May 14, 2014 8:56pm EDT

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(The following statement was released by the rating agency) SYDNEY, May 14 (Fitch) Fitch Ratings says that Australia's federal budget for the financial year ending June 2015 will lead to further differentiation in the credit profiles of Australian engineering contractors. The earnings of engineering companies reliant on the resources sectors have already been hit by the slowdown in mining sector investment. However, more diversified players have been able to mitigate the impact of a smaller mining sector by focusing on other areas like civil and electrical works, as well as infrastructure maintenance contracts. The winners are Tier 1 civil engineering contractors such as Lend Lease Group and Leighton Holdings Ltd, which benefit from the additional AUD3.5bn in mainly civil construction and related federal project funding. State and private sector funding will increase this amount to AUD17.5bn. These larger contractors will require the assistance and multidisciplinary skill base of diversified contractors such as Downer EDI Limited (Downer, BBB/Stable) and UGL Ltd. Downer in particular will be well-positioned to capitalise on both the civil construction work and the longer-term road maintenance and traffic control systems design and implementation contracts that the government plans to undertake. Downer has proven expertise in these areas and has developed strategic partnerships with international service and equipment providers. Moreover, Downer and UGL will likely benefit from increased demand for both passenger and commercial rolling stock, driven by rising intermodal traffic. At the losing end are engineering companies dedicated to the resources and energy sectors such as WorleyParsons Limited, Monadelphous Group Limited, Macmahon Holdings Limited and Clough Limited. There is little additional investment in water, energy or electricity transmission in the budget. Hence there is likely to be a labour and skills migration from the resources services sector to the transport infrastructure sector, resulting in further pressure on margins. The capital investment in infrastructure will drive labour efficiency gains. Moreover, more people are likely to join the labour force as a result of reductions in transfer payments such as lower family tax benefits in the new budget. These factors may reduce overall labour costs and support margins for civil construction and operation and maintenance companies. Contacts: Johann Kenny, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd., Level 15, 77 King Street, Sydney NSW 2000 Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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