Up, up and away for Downer


Engineering and infrastructure services company, Downer EDI Limited (ASX: DOW), has seen its share price rise more than 11% on Monday, after reporting a 22.5% increase in revenues to $8.5 billion and a 17.4% increase in underlying net profit to $195.3 million over the previous year.

The company also announced that a high proportion of its 2013 financial year revenues are in hand, with a strong contract win rate as part of more than $20 billion of total work in hand and net debt falling 25% to $368.8 million.

All of the company’s divisions appear to be performing well. Contract mining services reported earnings before interest and tax (EBIT) up 45% from $119.6m in 2011 to $173.5m in 2012. That should be good news for other companies providing mining services such as Leighton Holdings Limited (ASX: LEI), Monadelphous Group (ASX: MND) and Structural Systems Limited (ASX: STS). Despite the fall in commodity prices, and subsequent fears of less resources projects, it appears that higher quality mining services companies are still winning their fair share of long-term contracts.

Downer’s Infrastructure division EBIT rose 38% to $150.7m in 2012 over the previous year, and its other divisions such as Rail and New Zealand improving.

It appears that the company’s turnaround plan is working, with non-core assets sold off and a simplified structure. After facing several issues over its Waratah Train Project including taking a $250m provision in financial year 2011, the project appears to back on track. The company seems to have learnt its lesson with that project, announcing that its rail division is moving out of locomotive construction and into sales, maintenance and asset management – something the company appears much better at.

Mining contracts that up for renewal have been renewed and the company has had more contract wins. Debt is being repaid, with the company using its cash to repay debts rather than paying out dividends, while it has achieved $140m in cost savings over the last two years, with a further $100m in savings being targeted in 2013.

Outlook

Downer has stated that there is an increasing level of uncertainty around the level and timing of government and private sector investment in infrastructure booth in Australia and New Zealand. The company expects to report EBIT of around $370m and a net profit after tax of $210m in the 2013 financial year, an increase of around 7.5% over 2012’s result.

Foolish takeaway

Despite the apparent turnaround in the company’s fortunes and future outlook, investors face a number of risks with any investment in Downer. Relatively high levels of capital expenditure and the associated levels of debt, along with low profit margins means the company requires exceptional management to avoid any bumps along the road.

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Motley Fool writer/analyst Mike King owns shares in Leightons. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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