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Kalkine Daily 23/02/2015 + Downer EDI

Feb 23, 2015

| Read Time :10 Mins

In today’s daily we have covered Downer EDI (BUY).

The S&P 500 was up by 12.85 points or 0.61% on Friday and closed at 2110.30 points. The Dow and S&P 500 ended at record highs on Friday and the Nasdaq notched an eighth straight day of gains after Greece and euro zone finance ministers reached a deal to extend heavily indebted Greece's financial rescue by four months. With worries about Greece taking a backseat, investors this week could focus on the slew of expected economic data, including several reports on the housing market, consumer confidence, the consumer price index and the preliminary fourth-quarter reading on gross domestic product.

The eurozone composite purchasing managers’ index rose for a third successive month in February, reaching its highest level since last summer. Despite a brightening growth picture, companies continued to report declining selling prices in February. This means that thedeflation threat is still alive and kicking, justifying the ECB’s quantitative easing, due to begin next month. Meanwhile, the minutes of the Federal Reserve’s January policy meeting — released on Wednesday — were scoured for hints as to when the central bank might raise interest rates.

S&P 500 Daily Chart (Source – Thomson Reuters)

S&P ASX 200 was down by 22.7 points or 0.38% on Friday and closed at 5881.5 points. A surprise $6.5 billion takeover bid for Toll Holdings by Japan Post on Wednesday added 7.3 points to the ASX 200 over the week. Toll was the best-performing stock in the benchmark index, gaining a staggering 46.7 per cent to end the week at $8.97. Wesfarmers was up 3.9 per cent to $46.39, after reporting 8.3 per cent increase in net profit to $1.37 billion in the December half. Woolworths was also up 2.7 per cent to $33.26.

Telstra Corp added 0.3 per cent over the week to $6.61, despite a temporary fall early Friday on the shock announcement that chief executive David Thodey will step down to be succeeded by Andy Penn. Resources giant BHP Billiton gained 0.4 per cent this week to close at $32.30, main rival Rio Tinto gained 0.2 per cent to $63.75. The big four banks had a mixed result last week. Commonwealth Bank of Australia was down 3.2 per cent last week to $90.21, while Australia and New Zealand Banking Group was down 2.6 per cent to $34.81. Westpac Banking Corporation gained 0.3 per cent to $37.63. National Australia Bank stayed the same at $37.48.

S&P ASX 200 (Source – Thomson Reuters)

Top Performers on the ASX 200 were :-

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Stock Of the Day - Downer EDI (BUY)

Downer EDI announced a slightly weaker first half fiscal 2015 result than we anticipated with operating revenue down 10% to AUD 3.4 billion and net profit after tax or NPAT down 4% to AUD 95 million despite two months inclusion of earnings from the recent acquisition Tenix. The decline in revenue and earnings was mainly due to the cyclical downturn in the resources sector impacting demand for Downer’s contracted mining and engineering services.

Financial Highlights (Source - Company Reports)

Subdued domestic economic conditions and completion of a number of large projects including the Waratah train Project, contributed to the fall. Work in hand fell by 8% to AUD 18 billion but does not include a AUD 1 billion contract awarded by Pacific National to Downer in early February, for locomotive maintenance during the next 10 years. Operating cash flow fell by 8% but remained strong at AUD 258 million supporting the 9% increase in interim dividend to AUD 0.12 per share fully franked.

Downer Tenix Revenue (Source - Company Reports)

Management reaffirmed Downer was on track to achieve fiscal 2015 NPAT of around AUD 210 million. Evidence of the successful integration and expansion of the Tenix business will be catalysts to an improved share price. Downer has established a solid competitive position in the Australian and New Zealand infrastructure market benefitting from scale and strong customer relationships.

Downer EDI Daily Chart (Source - Thomson Reuters)

The business continues to build strong momentum towards delivery of high quality operational performance despite the cyclical downturn in conditions. Downer’s infrastructure division increased operating revenue by 1% but earnings before interest and tax or EBIT fell 17%. The fall in earnings was despite the consolidation of Tenix’s revenue and earnings for November and December. Based on the above we put a BUY recommendation on the stock at the current price of $4.28.

Team Kalkine

Level 13 167 Macquarie Street
Sydney NSW 2000 Australia
E-Mail - [email protected]
Phone - 02 8667 3147

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