Downer On An Upper

This story features DOWNER EDI LIMITED. For more info SHARE ANALYSIS: DOW

By Chris Shaw

Engineering services provider Downer EDI ((DOW)) beat market expectations with its full year profit result, earnings of $189 million coming in 7-8% above consensus market expectations as both operating cash flows and work in hand recorded solid increases.

Guidance for FY10 was also encouraging, the company indicating earnings growth next year should be in the order of 5% in net profit terms thanks to improvements in margins and some top-line growth. The result and guidance has caused upgrades in the market, Citi lifting its numbers in FY10 by 15% and in FY11 by 17%, such that in earnings per share (EPS) terms it now expects 61c and 67c respectively.

Bank of America Merrill Lynch has raised its forecasts by 5% through to FY12, though the broker points out its numbers were already above consensus. In EPS terms it is now expecting 60.2c in FY10 and 70.5c in FY11, while JP Morgan is at 58.6c and 64.8c respectively. Consensus forecasts according to the FNArena database are 57.7c and 63.8c for FY10 and FY11.

While the economic outlook remains uncertain, Citi does expect the company to be able to deliver on stronger margins in coming years regardless of conditions as cost savings and factors such as a run-off in legacy revenues should deliver a better overall result.

The other point the broker makes is given four consecutive good six-month results it is time the market recognises the company for what it now is, which is as a well managed group with a good track record and none of the previous legacy issues that contributed to the shares trading at a discount to peers.

To reflect this and its higher earnings forecasts, which it still regards as conservative, the broker has retained its Buy rating and lifted its target price to $9.00 from $6.10,  while Bank of America Merrill Lynch has pushed its target to $8.50 from $7.70 suggesting as earnings guidance for FY10 is better than peers, the stock should not trade on a discount to them. Deutsche Bank agrees, suggesting the share price should begin to close its historical discount to peers as recent results make previous issues largely a thing of the past.

Bank of America Merrill Lynch’s new target reflects an in-line earnings multiple and in the broker’s view the company is well placed to take advantage of opportunities as they present themselves. There should be a number of such opportunties in its view as resources and infrastructure spending in Australia should remain at high levels in coming years, so it expects the share price will benefit.

RBS has made a bigger jump in target to $8.01 from $4.25, pointing out earnings are now showing the benefit of the group’s efficiency program as well as its good strategic positioning. Despite the change in target the broker retains its Hold rating though, taking the view the upside is priced into the stock at current levels.

Overall the FNArena database shows a total of six Buys, two Holds and one Reduce, GSJB Were being the only one to change its rating post the result in upgrading to Buy from Hold. The average price target on the stock is $8.05, up from $5.76 prior to the result.

Shares in Downer EDI today are weaker and as at 1.30pm the stock was down 22c at $7.58. Over the past year it has traded between $3.01 and $8.14.

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