Industrials

Downer guides to strong earnings bounce in FY23

Wed 27 Apr 22, 12:43pm (AEST)
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Key Points

  • Year to date, Downer’s core earnings (EBITA) are down -4.7%
  • The company is targeting weighted average sector spending growth of 7-8% compound annual growth rate out to FY25
  • Morgan Stanley expects an earnings recovery by the year's end

Despite the entire market being dragged down (1.2%) for third consecutive trading day, courtesy of Wall Street jitters ahead of tech earnings reports, Downer EDI (ASX: DOW) managed to defy the downward trend this morning.

Clearly hungry for any good news, the market responded favourably to Downer’s predicted earnings rebound, with the share price up 4.72% around noon today.

To the uninitiated, Downer provides a broad range of services including maintaining 28,000-plus kilometres of Australian roads, plus building and maintaining electricity and gas networks and providing catering and cleaning services to schools and hospitals.

The company also operates public transport networks such as Newcastle’s buses, ferries and light rail through a joint venture, Keolis Downer.

Earnings hit

Within today’s market update Downer notes demand remains strong across its business units with strong contract awards.

Despite heavy rain and floods that hit Qld and NSW over summer - that disrupted the company’s roads, utilities and facilities businesses - and covid in NZ having a year-to-date impact on earnings (EBITA) of $50-$60m, management guided to a strong June quarter.

Meantime, year to date, Downer’s core earnings (EBITA) are down -4.7% compared with a year earlier.

Rebound

Despite maintaining a cautious outlook to prices on new contracts, the company expects a strong fourth quarter, followed by a strong rebound in earnings in FY23.

Grant Fenn CEO highlighted the importance of correct contract pricing, and where possible, expects the company to pass on rising costs to customers.

Fenn flagged immediate priorities as earnings and cash performance in FY22, managing covid, supply chain, workforce availability, contract pricing, cost management and pre-contract risk management.

Looking through the noise, Fenn told investors that the company is targeting weighted average sector spending growth of 7-8% compound annual growth rate (CAGR) out to FY25.

Fenn also reassured investors that the company is in the right sectors, at the right time as is heavily leveraged to the New Energy economy.

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Downer EDI share price movement today.

What brokers think

Based on the brokers that cover Downer (as reported on by FBN Arena) the stock is trading with 18.2% upside to the $6.18 target price.

Consensus on Downer is Moderate Buy.

Based on Morningstar’s fair value of $6.29, the stock appears to be undervalued.

Morgan Stanley expects an earnings recovery by the year's end and maintains an Overweight rating, while the price target is lowered to $6.70 from $6.90.

Credit Suisse expects short term weakness in the share price but retains a Neutral rating in the expectation that issues won’t impact on FY23. Target price is steady at $5.40.

Macquarie expect Downer to benefit from new work fixing potholes and other damage to roads caused by the heavy rains, and retains an Outperform, with the target price reducing to $6.50 from $6.68.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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