Industrials

Downer lands $800m in road maintenance contracts

Wed 22 Jun 22, 11:35am (AEST)
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Key Points

  • Two road maintenance contracts by Auckland Transport are valued at around $800m
  • Share price is down -12.35% over one year
  • Macquarie is forecasting a 27% rebound in earnings in FY23

Downer (ASX: DOW) was up 1.01% at the open following revelations that the provider of integrated services in Australia and NZ has been awarded two road maintenance contracts by Auckland Transport, valued at around $800m over a maximum term of 10 years.

Commencing 1 July, the contracts are for initial five-year terms plus five-year extension options.

Downer will act as stewards of Auckland Transport’s Central network and North Rural network, delivering maintenance and renewal activities and emergency repairs.

Commenting on today’s announcement, CEO of Downer NZ, Steve Killeen notes Downer is no stranger to Auckland Transport having maintained roads in region for more than 30 years.

Recent wins

Today’s announcement follows recently inked NZ contract wins, including an Electrical Field Services Agreement with energy provider Powerco, worth approximately $360m over a maximum term of five years, and a $100m contract with Transpower.

Closer to home, late April the company was awarded a $30m contract from the Department of Defence to plan the proposed Riverina Redevelopment Program.

Once completed, a $1.1bn delivery phase may follow, subject to government and parliamentary approvals.

Interim

Down -12.35% over one year, the share price fell -7% early February after the company posted a mixed-bag first half result.

Total revenue of $6bn was down -2.3%, while statutory earnings (EBITA) of $186.2m were down -4.9% due to the loss of contributions from the Mining and Laundries divestments made in the current and prior periods.

However, after removing the amortisation component of Downer’s earnings, statutory earnings (EBIT) were up 5.9%.

The company also managed to decreased gearing from 19% to 16.5% due to strong operating cash flows and proceeds from the divestment program.

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Downer EDI share price over 12 months.

What brokers think

Year-to-date, Downer’s share price has bounced from a high of $6.04 at the start of the year to a low of $4.91 early March, before regaining former losses and then giving them all back again late June.

Consensus on Downer is Moderate Buy.

Based on Morningstar’s fair value of $6.54 the stock appears to be undervalued.

Based on the five broker that cover Downer (as reported on by FN Arena) the stock is currently trading with 21.5% upside to the target price of $6.04.

Ord Minnett notes the company's transition over the last couple of years to a focus on urban services and maintains a Hold rating while the target price slips to $5.70 from $5.80. (10/05/22).

Macquarie is forecasting a 27% rebound in earnings in FY23 and retains an Outperform rating with the target falling to $6.25 from $6.50. (28/04/22).

UBS believes the company is well positioned for government infrastructure investment and is forecasting earnings (EBITDA) growth of 9%.

The broker retains a Buy, with the target price easing to $6.40 from $6.50. (28/04/22).

Downer is an S&P/AX200 stock, with 10 of the top shareholders accounting for round 50% of the register.

The company is forecast to deliver dividend yield of 4.8% and 16% in FY22 and FY23 respectively.

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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