Stocks’ Details

Downer EDI Limited

DOW Selected as Preferred Contractor Under Perth’s METRONET Program:  Downer EDI Limited (ASX: DOW) is a leading provider of integrated services across Australia and New Zealand. On 25 November 2019, the company, as a member of the NEWest Alliance, has been selected as a preferred contractor to deliver the Yanchep Rail Extension and the Thornlie – Cockburn Link, as part of Perth’s METRONET program. The project will be delivered in a joint venture partnership with CPB Contractors, which is a part of CIMIC Group.

FY19 Financial Highlights for the Period Ended 30 June 2019:DOW declared total revenue including joint ventures and other income at $13,448.3 million, up 6.6% on y-o-y basis. This was aided by increased activity in utilities, EC&M and mining, partially offset by lower revenue in transport and facilities. Underlying net profit after tax and before amortisation of acquired intangible assets (NPATA) stood at $340.1 million, up 14.7% from FY18. The company reported underlying EBITDA margin at 4.2%. The company reported work-in-hand at $44.3 billion, up 5.5% from previous financial year. Within the urban services category, the business includes three segments namely transport, utilities and facilities which represents 76% of the total revenue and 83% of company’s EBITA. The above segment reported an EBITA margin of 5.4% in FY19. Mining, Energy and Industrial services derives 24% of the total revenue which posted an EBITA margin of 3.5%.


FY19 Financial Highlights (Source: Company Reports)
 
 
Outlook:In FY20, the business is targeting consolidated NPATA of ~$365 million before minority interests. Yanchep Rail Extension and the Thornlie projects are expected to commence in May 2020, with expected completion in 2023. Downer is also currently delivering Stage 1 of the Parramatta Light Rail project in a 50:50 joint venture with CPB Contractors for the NSW Government.

Stock Recommendation: The stock of DOW is quoting at $8.090 with a market capitalization of ~$4.82 billion. The stock has generated returns of 5.61% and 2.02% during the last three months and six-months, respectively. The stock is trading at the upper band of its 52-week trading range of $5.955 and $8.41. The company reported its expertise in the design and construction of heavy rail, tracks, stations and rail bridges and has been selected as the preferred contractor under the Perth’s METRONET program. During FY19, the business reported EBITDA margin and net margin at 6.5% and 2.2%, up from FY18 margins of 6.3% and 0.6%, respectively. On the valuation front, the stock is available at an enterprise value (EV) to sales multiple of 0.5x on trailing twelve months (TTM) basis as compared to the industry median of 1.6x. Considering the recent price-movement, trading levels, margin improvements, valuations and business prospects, we recommend a ‘Hold’ rating on the stock at the current market price of $8.090, down 0.123% on 25 November 2019.
 

CIMIC Group Limited

Partnership with Downer: CIMIC Group Limited (ASX: CIM) is an engineering-led construction, mining, services and public private partnerships leader working across the lifecycle of assets, infrastructure and resources projects. On 25 November 2019, the company has been selected as the preferred contractor to deliver the Yanchep Rail Extension and the Thornlie – Cockburn Link in partnership with Downer, under Perth’s METRONET program.

H1FY19 Financial Highlights for the Period Ended 30 June 2019: CIM announced H1FY19 results wherein, the company reported revenue at $6,955.1 million, up 0.3% from previous corresponding period. NPAT of the company came in at $366.7 million as compared to $362.8 million in H1FY18. The business reported higher net finance costs driven by higher levels of bonding due to the growth of the Australian Construction business and successful closing of PPP projects and working capital initiatives. The company has a pipeline worth $60 billion for construction, mining and services for CY19 and $400 billion for 2020 and beyond.


H1FY19 Financial Highlights (Source: Company Reports)

Guidance: Work related to the METRONET project is likely to commence in the current financial year and is scheduled to be completed in 2023. The Management is expecting continued growth from the mining segment on the back of added opportunities across construction and services driven by strong PPP pipeline. As per FY19 guidance, the business is expected to deliver NPAT in the range of $790 million to $840 million, subject to market conditions

Stock Recommendation: The stock of CIM is trading at $32.80 with a market capitalization of ~$10.62 billion. The stock has generated negative returns of 29.85% and 22.04% in the last six months and twelve months, respectively. The stock is quoting at the lower band of its 52-week trading range of $28.88 and $51.50. CIM is playing a key role in the landmark METRONET project and to support the ongoing development of Perth as a vibrant, world-class city. The company has a long track record in Western Australia (WA) in both infrastructure and resources and will work hard to leverage this experience on the METRONET project. During H1FY19, the company has delivered EBITDA margin and net margin of 14.9% and 5.3%, higher than the industry median of 6.3% and 3.7%, respectively. The stock is available at EV/Sales multiple of 0.6x on TTM basis as compared to the industry median of 1.6x. On EV/EBITDA basis, the stock is available at 5.3x on TTM basis as compared to the industry median 6.8x. Considering the recent price movements, valuations, trading-range, margin-improvement and recent partnership with Downer for the Yanchep Rail Extension project, we recommend a ‘Buy’ rating on the stock at the current market price of $32.80, up 0.03% on 25 November 2019.
 

Atlas Arteria

Successful Completion of Underwritten Placement: Atlas Arteria (ASX: ALX) develops, operates and invests in toll roads and benefits communities through lowering travel time, higher time certainty, reduced fuel consumption and carbon emissions. On 25 November 2019, the company informed that it has completed the fully underwritten placement and the institutional component of the 4 for 21 pro-rata accelerated non-renounceable entitlement offer of new ordinary stapled securities, raising an approximate amount of $1.2 billion.

H1FY19 Financial Highlights for the Period Ended 30 June 2019: ALX announced its H1FY19 financial results wherein, the company reported income from continuing operations at $86.069 million, up 44.5% from H1FY18. The company reported loss after tax amounting to $87.55 million as compared to $15.5 million in previous corresponding period, majorly due to an impairment expense of $162.9 million. Fees paid to Macquarie under the Transition Services Agreement amounted to $750k per month from 16 May 2019, which will be part of the notable items for FY19. The company reported 1.1% y-o-y decline in total traffic during H1FY19.


H1FY19 Financial Highlights (Source: Company Reports)

Guidance:The acquisition of a further 6.14% indirect interest in APRR and ADELAC increases ALX’s operational influence and improves governance in respect of Atlas Arteria’s total post acquisition of 31.14% indirect interest in APRR and 31.17% in ADELAC. As a result, the company increased its H2FY19 distribution guidance from 16 cents per share to 17 cents per share. A similar distribution will also be paid in the first half of FY20. Moreover, the company expects corporate costs to perform in line with guidance.

Stock Recommendation:The stock of ALX is quoting at $7.85 with a market capitalization of ~$5.22 billion. The stock has given returns of -5.45% and 5.82% in the last three-months and six-months, respectively. The company is negotiating new shareholder agreements to increase its stake in APRR, which will add significant value for security holders. The stock is quoting at the upper band of its 52-week trading range of $5.848 and $8.447. H1FY19 EBITDA margin of the company stood at 33.7%, lower than the industry median of 51.8%. Considering the backdrop of the above factors, we have a watch stance on the stock at the current market price of $7.85, up 2.749% on account of the completion of underwritten placement as on 25 November 2019.
 
 
Comparative Price Chart (Source: Thomson Reuters)

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