Years ago I held Downer, but it seemed to be a well-established...

Years ago I held Downer, but it seemed to be a well-established company that must have had good management in its early decades to become successful, followed by less competent management, so I exited. Anyhow, Downer muddled its way downward so if it is now “ordinary”, that is better than the market sees it, so there was leeway for the SP to rise. If you Google "outlook for downer" peach” you will find an opinion to that effect.

The view given is that Downer is now CAPEX light, and it is not tempted to under quote to keep its fleet busy, and the city-based work it secures are individually smaller, hence on an impact basis, a few cock-ups can be digested. If that flight to being capital light is general, then the disciplined firms who stay in the game would do better in a less competitive market. More importantly, a stock like LYL (Lycopodium) is surprisingly CAPEX light, and via MET with Primero as its proxy, NWH is moving down what I call a Lycopodium-like path. The trick is to be experts in the field to avoid mistakes, and to consistently deliver above expectation to develop an aficionado following who will pursue the service deliverer, rather than the other way around.

The world is not going to stop projects that require CAPEX and switch into busking or writing poetry because they are CAPEX light. NWH can keep a percentage of its historical business, but increase the MET percentage. The soul-warming words “NRW will utilise an existing fleet comprising 200-250 tonne class excavators and 150 tonne class trucks together with ancillary plant.” in the Allkem’s Mt Cattlin Project LOI is an example the old-style business that is worth keeping. Where CAPEX is required, as was the case with Karara, then the financial strength of the customer and provisions in the contract must underwrite the CAPEX that each project requires.

On contract provisions, they can contain any reasonable expense-varying situation, including indexing for inflation and other indices like labour award rates. In the shipping business, the norm is for major shipping companies to publish freight rates monthly, and major exporters factor that into their contracts. It is easier to cut deals like that, because they have an appearance of fairness (the importer can benefit if the freight drops). I do not know the situation in Australia, but cement price indices are published by various governments abroad. The ABS produces a “producer price index (PPI) of cement across select capital cities in Australia”, but how appropriate it is to be referenced in a contract provision, I cannot say, because I have not looked into the issue.