Why is the Downer share price sinking 20% on Thursday?

The Downer EDI Ltd (ASX: DOW) share price is plummeting today after the company downgraded its guidance and revealed a historical accounting error with a potential $40 million impact.

The engineering and construction company has identified historical misreporting of its Australia utilities business’ revenue and work in progress in one of its maintenance contracts.

It also revealed it no longer expects to meet its prior profit guidance following a spate of severe weather.

After opening 29% lower at $3.39, the Downer share price tumbled to a low of $3.31 – marking a 31% plunge. It has since recovered slightly to trade 21.35% lower at $3.775 at the time of writing.

Let’s take a closer look at the news weighing on the S&P/ASX 200 Index (ASX: XJO) share today.

What’s happening with the Downer share price?

The Downer share price is plummeting to a new post-pandemic low as the market reacts to major news on the company’s upcoming earnings.

Irregularities in historical revenue reporting identified

Downer has revealed newly found issues with its past revenue reporting could result in a historical overstatement of pre-tax earnings of between $30 million and $40 million at the end of November 2022.

The company has begun a detailed investigation into the issues that appear to relate to the period between September 2019 and November 2022.

The overstatement appears to have accumulated over financial years 2020, 2021, 2022, and 2023.

Any potential ongoing impact is yet to be determined.

Guidance downgrade

Downer also provided a trading update this morning. The company previously anticipated its underlying post-tax profit would grow between 10% and 20% in financial year 2023. However, such expectations have since been binned.

Downer CEO and managing director Grant Fenn commented on the release decimating the company’s share price today, saying:

Although the business has a general skew to the second-half, we think that the challenge for the last seven months of [financial year 2023] has become too large.

Our road services and utilities businesses have been heavily impacted by weather and all businesses have been battling with staff shortages and supply chain issues.

These issues are dissipating but not in time for 2023 earnings.

Discounting any impact of the accounting irregularities, Downer now expects its full-year underlying profit to come in at between $210 million and $230 million.

Though, that assumes no further disruptions, including those from COVID-19, weather, or labour shortages.

The company will provide another update when it drops its half-year earnings in February.

Downer share price snapshot

The Downer share price is currently 38% lower than it was at the start of 2022. It has also dumped 36% since this time last year.

For comparison, the ASX 200 has fallen 5% year to date and 3% over the last 12 months.

The post Why is the Downer share price sinking 20% on Thursday? appeared first on The Motley Fool Australia.

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Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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