Ferrets Stock to Watch: DOWNER EDI LIMITED 09:11, Friday, July 27, 2007
A COMPANY REGAINING MARKET CONFIDENCE ON PROFIT RESULTS
Sydney - Friday - July 27: (RWE Aust Business News) ***************************************************
OVERVIEW ********
Downer EDI Ltd (ASX:DOW) has nothing to do with Wall Street but plenty to do with potential in the local industrial market.
It is an Australian top-100 company that provides comprehensive engineering and infrastructure management services to the public and private transport, energy, communications and resources sectors across Australia, New Zealand, Asia Pacific and into the United Kingdom.
A number of brokers have Downer EDI on their prospective buying lists, because they are expecting a good result when the company reports on August 22.
Downer EDI's key drivers are mining, infrastructure and rail.
One analyst suggests that Downer EDI is trading at a significant discount to its peer group that all trade on 20-plus multiples.
The company has had a chequered career at times but the signs indicate that it won't let shareholders down this time around with present guidance around $158 million for FY07 which could go even higher.
One current financial analysis believes that, Downer on its guidance, has a P/E of 14.5 and EPS of 49.2c.
This is a sizable discount to stocks like United Group of 21 and Transfield 27.
Downer EDI trades at a discount due to a slower earnings growth (than UGL and TSE) and higher construction risks.
The Downer analyst expects the company to deliver 13-15 per cent EPS growth a year over the next few years.
In addition, Downer has moved to cut construction risk by reducing fixed-cost contracts to no more than 10 per cent of revenue.
The company's internal-audit has expanded to tighten risk management practices and changes have been made to senior management.
The latest guidance is also under scrutiny for the reason that it is only a 14.5 per cent increase on the previous year, yet the company has made a significant acquisition in Emoleum which contributed only $2.3 million in EBIT last year.
Forecast for the full 2007 year should be about $17-$18 million.
In addition, Downer EDI has undertaken major capital expenditure in the last two years of at least $100 million, which should start generating additional EBIT of about $15 million this year.
Given strong industry conditions which is evident, Downer EDI should increase profit by 14 to 15 per cent before these extra items.
Even if Downer EDI meets guidance of $158 million, it is likely that FY08 earnings will be significantly higher due to strong conditions in each division.
On this basis Downer EDI should produce a FY08 profit of $182 million or EPS of 56.7c and pay a dividend of at least 34c per share.
It is trading on a FY08 P/E of 12.5 and a yield of 4.8 per cent.
On the charts Downer EDI shares appear to be starting to breakout of a downtrend.
The signal of better times ahead flashed to the market in February following release of the interim report with directors declaring that the recovery year was progressing well.
Highlights were:
* Revenue of $2.6 billion, up 15 per cent;
* Profit after tax of $80.6 million, up 16 per cent;
* EBIT of $123.7 million, up 25 per cent;
* Interim dividend of 13c (unfranked);
* Divisions performing with secured sales of $9.8 billion.
Given the solid performance, the directors declared an unfranked dividend of 13c per share (2005: 12c) which was paid in April.
Managing director Stephen Gillies said that he was pleased with the progress being made by the group in this year of recovery.
"Downer EDI has delivered on key targets with solid performances from the divisions," he said.
"We have consolidated our market position with key contract wins and the successful integration of acquisitions including Emoleum."
SHARE PRICE MOVEMENTS *********************
Shares of Downer EDI yesterday fell 16c to $7.20. Rolling high for the year is $7.85 and low $4.91. Dividend is 21c to yield 2.92 per cent. Earnings per share and p/e ratio are in negative based on last year's results. The company has 321 million shares on issue with a market cap of $2.3 billion.
In July, Downer EDI launched a new branding portfolio covering the corporate entity and its core businesses.
The primary business division names of Downer EDI have changed to:
* Downer EDI Engineering (previously Downer Engineering)
* Downer EDI Mining (previously Roche Mining)
* Downer EDI Works (previously Works Infrastructure)
* Downer EDI Rail (previously EDI Rail)
The brands of the corporate entity and primary business divisions have also changed to provide a more cohesive alignment across the group.
No changes have been made to the company names and brands of the consulting businesses of Downer EDI, which include CPG Corporation, Duffill Watts Group, Coomes Consulting and Snowden Group.
Commenting on the move, Mr Gillies, said the changes in company names and brand identity accompany an extensive internal program of alignment across the group around culture, processes, systems and client service and these activities have been in play for some time.
"Downer EDI organisationally will continue to benefit from the growth opportunities on offer," Mr Gillies said.
"It has been necessary to transform and integrate our business, better define our corporate identity and brand and make this more visible to our clients and our many other stakeholders.
"The changes take the strength of our divisions and maximises them under the corporate banner and are designed to give Downer EDI a more global, uniform corporate identity and greater visibility," he added.
BACKGROUND **********
Downer EDI Ltd listed on the Australian Stock Exchange in 1998, with a secondary listing on the New Zealand Stock Exchange in 2002.
Historically, Downer EDI can trace its roots back to the 1930s when it commenced business as a privately owned New Zealand-based civil construction and engineering company.
It expanded geographically into Australia, Hong Kong and Singapore in the early 1990s, and in the mid 1990s established its core strategy of providing engineering design, operations and maintenance services to essential infrastructure assets, including roads and rail networks, power generation and distribution assets, mining operations and telecommunication networks and facilities.
Downer EDI has grown significantly over the past 10 years through the organic growth of each of its divisions and through strategic acquisitions which have complemented and enhanced the core capabilities of the group.
The company has demonstrated a long history of successful operations through a variety of economic cycles, maintaining solid growth in revenue and cash flow and developing market positions and its business mix.
Downer EDI's business today is characterised by a stable but diverse client mix in both the public and private sectors.
The company has focused on increasing stability of opportunities, lengthening terms of contract and carefully managing geographical and customer spread in order to strengthen its business and reduce its risk profile.
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