Joshua Peach: Shares in integrated services firm, Downer, have more than halved in recent years, hit by declining revenue growth, operational issues, and more recently, an accounting scandal. But the outlook for the company might be brighter than the market expects. That's according to Morningstar analyst Mark Taylor, who joins me here today.

Thanks for joining us today, Mark. So, shares in the company have taken quite a hit in recent years. What's been driving that sell-off?

Mark Taylor: Well, you've had a confluence of factors, but one of the key things is you've had three years of back-to-back La Niña weather events, which has just really hit, particularly the transport segment earnings of the company. But you've also had labor shortages, which have driven costs up, and some accounting irregularities, which mean that revenue has taken a hit, particularly in the last half.

Peach: Despite that sell-off, shares in the company are trading at quite a discount to Morningstar's fair value estimate. Why do you think the market isn't quite pricing in the outlook?

Taylor: Well, I think the market has probably overreacted to the negatives. A lot of them are short-term negatives, and it was a case of a perfect storm, but it's not something that we'd expect to continue in perpetuity. And there are actually a lot of strong underlying fundamentals for the longer term, not the least of which is lower capital intensity, because a lot of the high capital-intensive businesses, including mining and laundries, have been sold down, which means that you don't need much of an improvement in revenue and margins to really drive incremental growth. Returns on invested capital, you should see them improve quite dramatically with even modest improvements in revenue and costs.

Peach: You mentioned the mining and laundries business. In your report, you say the company has gone through a bit of a transformation. What are the ways is this company perhaps different from the Downer that investors may have seen a few years ago?

Taylor: Well, I mean, that covers it chiefly. These businesses were high capital-intensive businesses, but they're also operating in a competitive market. So, there was always the temptation to underprice for those contracts, chasing those contracts. And then, when one goes wrong, the implication is very serious because you've got a lot of money invested. The new urban services business model, which is capital light, you don't have that same kind of risk. Well, obviously, you don't want to underprice in your contracts. If you do, then you're not going to have the same level of magnitude of earnings detraction or loss of capital that you had under the old business model.

Peach: With that in mind, declining revenue growth has been a bit of an issue for investors over the last few years. Do you see that metric improving going forward?

Taylor: Yeah. Well, yes, I do see it improving. And I think the decline that you have seen in the past, a lot of it is misunderstood. It's been a function of non-core businesses being sold down. So, the revenue has naturally declined. But if you look at continuing businesses, revenue has continued to grow largely over recent years. So, there's a positive trend from revenue, and it's also seen in the work in hand balance, which has grown on the basis of continuing businesses as well.

Peach: You mentioned those accounting irregularities a little bit earlier. Since that happened, we've had a few departures from management and also from the board. Do you think that should be concerning investors?

Taylor: It can be concerning on the one hand, where you've got some knowledge that goes. But I think it basically had to happen and start with a clean slate. You still have some people in there that have got history with the business and so they know the ins and outs. But the new blood and the eagerness to drive cost-outs and see the business improve, I think is a good thing and should be a comfort to investors on balance.

Peach: What are you hoping to see going forward to trigger shares to re-rate and validate this thesis?

Taylor: Well, I think what we want to see basically is that revenue growth is an evidence and that margin improvement is also an evidence. Recently, margins were absolutely hammered with weather and accounting scandals in the last half EBITDA margin down to about 3.5%. We'd like to see that sort of trending up towards 5%, which is our mid-cycle target for the thesis validation.

Peach: Thanks again, Mark.

Taylor: Thank you.