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Profit growth isn’t the only thing pushing the Downer EDI share price higher

The Downer EDI Limited (ASX: DOW) share price jumped to a three-month high on the back of its full year results and outlook.

The DOW share price jumped 1.2% to $7.64 in morning trade as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index gained 0.5%.

The engineering and construction group isn’t the only one in the sector that’s on the front foot. The Cimic Group Ltd (ASX: CIM) share price is up 1% to $31.61 while the Lendlease Group (ASX: LLC) share price is ahead by 2% to $16.31 at the time of writing.

More than profit growth

But it’s the quality of Downer’s profit results that stand out. The group posted a 14.7% increase in underlying net profit after tax before acquired intangibles (NPATA) to $340.1 million on the back of a 6.6% rise in revenue to $13.45 billion.

What’s more, operating cash flow jumped 8% to $630.2 million and underlying earnings before interest, tax and amortisation (EBITA) margin inched up 40 basis points to 4.2%.

While there are more companies beating than missing expectations during this August reporting season, not many would be able to lift margins given rising cost pressure.

Why Downer’s outlook still looks good

But the pace of profit growth is expected to slow in FY20 with management forecasting NPATA to increase around 7% to $365 million.

That isn’t enough to take the shine off the results as there are several things going in Downer’s favour.

For one, the weakest links in the group seem to be easing following Downer’s recent positive update on its expected liability linked to the Murra Warra wind farm and a new agreement with the troubled Royal Adelaide Hospital project.

The group is also favourably positioned to benefit from increased infrastructure construction spending with urban services accounting for 76% of group revenue (not to mention it generates margins that are more than 50% better than its mining works division).

Foolish takeaway

There’s speculation that Downer could be looking to sell its mining engineering business, and it isn’t the only one that looks keen to be divesting assets as Lendlease is also looking at selling part of its business as well.

Downer may not be the only engineering group that’s exposed to infrastructure spending, but I believe it’s one of the better placed stocks in the sector.

The only thing I was hoping to see was an increase in its dividend given the good result and improved cashflow. Management had instead opted to keep its final payout flat at 14 cents per share (franked at 50%).

This takes its FY19 total dividend to 28 cents per share.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

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 Scott Phillips.

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