VDM Group expects to book an operating loss for the 2009 financial year as current business conditions result in a write off of goodwill by up to $85 million.
VDM Group expects to book an operating loss for the 2009 financial year as current business conditions result in a write off of goodwill by up to $85 million.
In an update to the market today, VDM said its operating performance had been "negatively affected" by a combination of factors including weak business confidence, highly competitive tenders resulting in margin erosion and restructuring expenses.
"The restructuring expenses have been significant and coupled with the trading performance is likely to cause the Group to report an operating loss for the full year," VDM said.
In addition, the engineering and construction company said it is reviewing its property portfolio and forecasts a write down of around $15 million.
Overall, the board expects the goodwill on its balance sheet to be written down by between $75 million and $85 million.
"In coming to this view, the Board noted that a large amount of goodwill on the Company's balance sheet was generated from the purchase of businesses financed partly by VDM Group shares issued at prices significantly higher than the current market price of VDM Group shares, " it said.
Given the unfavourable condition the company is in, VDM said it will not be paying a final dividend for fiscal 2009.
VDM acting chief executive Jim van der Meer said while the forecast is disappointing, the company is well positioned for the 2010 financial year following the recent contract win for CITIC Pacific's Sino Iron project.
"The financial benefits of this contract mostly flow into the 2010 financial year," he said in a statement.
"Turnover in the 2009 financial year is expected to be approximately $450 million, which is 10% higher than the 2008 financial year; however, earnings have been materially impacted by the downturn in the economy and reduced margins.
"Consolidation of the corporate head office and other business operations to Osborne Park will result in considerable savings in overheads and improve efficiencies.
"To date we have an order book value of $230 million, or 55% of our anticipated turnover of approximately $420 million for the 2010 financial year.
"Our main focus going forward is to improve margins in all divisions, which I believe will result in a significant increase in earnings for the 2010 financial year."
VDM is the second company this month to forecast a loss for the 2009 financial year with drilling services company Brandrill earlier flagging a loss due to a series of recent deferrals in major projects.
Shares in VDM shed 3.5 cents to 21.5c at 11:18 AEST.
The announcement is below:
Perth, 15 June 2009: In accordance with ASX Listing Rule 3.1 and Guideline Note 8, VDM Group Limited (ASX: VMG) provides the market with an update on the Company's anticipated full year performance and the resultant decisions taken by the Board of Directors.
Earnings Performance
Group operating performance has been negatively affected by the global financial crisis, weak business confidence, highly competitive tenders causing margin erosion, and restructuring expenses. Management has responded to these business conditions by addressing staff numbers and working hours, reducing overheads and realigning future business focus. The restructuring expenses have been significant and coupled with the trading performance is likely to cause the Group to report an operating loss for the full year. In addition, the Board is reviewing the Group's property portfolio and envisages that asset and investment values associated with the property portfolio may need to be written down by approximately $15 million.
Write Down of Goodwill
In accordance with Accounting Standards, the Company is required to assess the carrying value of goodwill against the value of forecast discounted cash flows to be generated by the business units. As a result of the current business conditions and based on the current impairment modelling undertaken by management, the Board expects that goodwill on the balance sheet should be written down by between $75 million and $85 million. In coming to this view, the Board noted that a large amount of goodwill on the Company's balance sheet was generated from the purchase of businesses financed partly by VDM Group shares issued at prices significantly higher than the current market price of VDM Group shares.
Dividend
As a consequence of the expected full year performance and the need to retain cash during the current credit squeeze, the Board has determined that a final dividend for the 2009 financial year will not be paid.
Comments
VDM Group Acting Chief Executive Officer, Jim van der Meer, said: "The expected result for the full 12 month period is disappointing; however, management and staff have responded positively to the implementation of the restructuring initiatives. VDM Group is well positioned in the market as evidenced by the recently awarded bulk earthworks contract for the Sino Iron Project port. The financial benefits of this contract mostly flow into the 2010 financial year. Turnover in the 2009 financial year is expected to be approximately $450 million, which is 10% higher than the 2008 financial year; however, earnings have been materially impacted by the downturn in the economy and reduced margins. Consolidation of the corporate head office and other business operations to Osborne Park will result in considerable savings in overheads and improve efficiencies. With a simplified business structure and improving business conditions we are well placed to take advantage of the benefits flowing from this restructuring and consolidation. To date we have an order book value of $230 million, or 55% of our anticipated turnover of approximately $420 million for the 2010 financial year. Our main focus going forward is to improve margins in all divisions, which I believe will result in a significant increase in earnings for the 2010 financial year."
VDM Group Chairman, John Saleeba, said: "The write down of goodwill is a non-cash accounting entry required by current accounting standards. The Board has instructed management to use conservative estimates of future profitability to determine the forecast cash flow modelling for impairment testing purposes. The Board considered that in the current economic circumstances it is prudent to take a conservative approach rather than try to substantiate values created from transactions in different economic times. The same approach was taken in assessing the assets associated with the Company's property portfolio. Over the past three years we have put together an excellent portfolio of businesses that have demonstrated their ability to generate strong sales in a challenging market. Our objective is to optimise profitability from the level of sales we know we can achieve to drive our growth."
