Why the Downer EDI Limited share price is soaring today

Credit: Thomas of Tortuga

What: The share price of engineering services firm Downer EDI Limited (ASX: DOW) has jumped around 5% by lunchtime today after the group reported an interim profit result which obviously pleased the market.

So What: While the statutory results for the six months ending 31 December 2015 may not immediately look all that exciting with revenue slipping 1.2% to $3.5 billion, profits tanking 23.9% to $72 million and diluted earnings per share slumping 24.9% to 15.1 cents per share, there were obviously some aspects which did excite investors.

Firstly, an interim fully franked dividend of 12 cents per share was maintained.

Secondly, the outlook statement provided some comfort, here’s what was said:

“Downer stated at its full year results in August 2015 that it was targeting NPAT of around $190 million for the 2016 financial year. As announced on 1 February 2016, the ACTivate consortium was not successful in its bid for Capital Metro and, as a result, Downer has written off $13 million in pre-tax bid costs in the 2016 first half result. Downer is now targeting NPAT of around $180 million for the 2016 financial year.”

Now What: Downer’s management is obviously expecting a much stronger second half and allowing for the write-off on the ACTivate bid costs, earlier full year guidance has essentially been maintained.

Based on current pricing, Downer is trading on a price-to-earnings (PE) ratio of approximately 7 times. That certainly isn’t expensive if current earnings represent a bottom of the cycle base level.

There are however a significant number of peers in the engineering, contractor and mining services sector which also trade on similarly low, single-digit multiples.

For example, Broadspectrum Ltd (ASX: BRS) is trading on a forward multiple of around 8 times, while Worleyparsons Limited (ASX: WOR) is on a forecast PE of just 4 times. These low multiples suggest that the market isn’t comfortable yet with the outlook for the sector despite the apparent value on offer.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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