Downer EDI Limited

DOW Details

Latest Developments: Downer EDI Limited (ASX: DOW) offers integrated services in New Zealand and Australia to utilities, facilities, transport, engineering, construction, and maintenance (EC&M), and mining industries.

• In an ongoing share buy-back program, DOW recently bought-back ~244,036 shares for ~$1.178 million. It now has ~45.99 million remaining shares which it plans to buy-back.
• On 3 March 2022, EROAD Limited (ASX: ERD), a transportation technology services firm declared the renewal of its largest enterprise customer contract with DOW for ~5,500 units which stretches through to December 2025.

1HFY22 Results (Ended 31 December 2021):

• DOW reported an increase in statutory NPAT by ~17.7% YoY to ~$89.0 million in 1HFY22 led by growth in earnings from the transport and facilities sector of the core urban services businesses segment.
• The EBITA from the core urban services businesses stood at ~$238.0 million, up by ~4.4% YoY in 1HFY22.
• Gearing has lowered by 2.5percentage points (pp) from ~19.0% as of 30 June 2021 to ~16.5% due to robust operating cash flows and funds received from the divestment program.
• DOW held ~$2.1 billion in liquidity constituting ~$676.7 million of cash balance and ~$1.4 billion of undrawn debt facilities, as of 31 December 2021.

Performance of Sectors within the Core Urban Services Businesses; (Analysis by Kalkine Group)

Key Risks: The company faces COVID-19 induced supply chain disruptions, lower work volumes, and labour scarcity. DOW also faces contract pricing risk on fixed agreements and deferment of work within the utility sector. 

Outlook:

• The company improvised its cost base and divested from its Mining operations in 1HFY22. It is currently implementing a share buy-back program and focuses on growing its core business portfolio.
• In August 2021, DOW predicted growth in its core Urban Services revenue and earnings for FY22. DOW plans to manage the continuing impact of COVID-19 on its work volumes, supply chain, and revenue mix and release an update on the investor day in April 2022.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of DOW gave a negative return of ~17.50% in the past three months and a negative return of ~25.07% in the past six months. The stock is currently trading near its 52-weeks’ low level of $4.790. The stock has been valued using the Price to Earnings-multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ median P/E multiple, considering the risk of realisation of pending claims (~$30 million) from Probuild Constructions (Australia) Pty Limited, the COVID-19 disruptions on the work volumes, and supply chain constraints. For this purpose of valuation, a few peers like CIMIC Group Ltd (ASX: CIM), Service Stream Ltd (ASX: SSM), Mader Group Ltd (ASX: MAD) have been considered. Considering the current trading levels, growth in core urban services businesses, diversified revenues from the transport sector, improved gearing, and indicative upside in valuation, we give a ‘Speculative Buy’ rating on the stock at the current market price of $4.810, as of 9 March 2022, 10:35 AM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

DOW Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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