Downer EDI Ltd (ASX: DOW) recorded revenue growth of 6.5% for 2019, but substantially boosting the business’s margins allowed them to increase underlying NPAT by 14.7% to $340.1m. The company’s urban services division, composed of stable, non-cyclical businesses in transport utilities and facilities now make up 83% of the company’s EBITA. This makes the business much more stable over the long term and enables it to be better protected against an economic downturn.
Renewable energy infrastructure project Downer worked on (Credit: Downer)
Another positive out of the result is a pickup in free cash flow generation in 2019, after three straight years of declines. This pickup should be welcomed, as profit growth that is not followed by growth in FCF sends a strong warning sign to investors that something is wrong within the firm.
Downer’s business is centred on urban infrastructure, and the company helps to design and manage these. The stock boasts sustainable and growing earnings, since the company focusses on a number of smaller, lower priced and higher quality projects than what competing businesses are centred on. The company’s business operates across designing, constructing and providing services to maintain assets. Downer works closely with client organisations and aims to develop customised solutions that meet every aspect of a customer’s demand. Most of their clients outside of the mining services division are government clients, which helps improve earnings stability.
One thing which could improve Downer’s earnings quality is the potential sale of their mining services division. This division makes up 13% of earnings and uses up more than 50% of the company’s capex, making it by far the more capital-intensive side of the business. There however a number of factors determining whether the sale will be a good idea, including sale price, how it will affect future earnings growth and the potential multiple re-rate. Nevertheless, it will be an important potential factor that investors should keep an eye on, given it could lead to a share price re-rate.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.