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Why the Downer EDI share price fell even as it wins an up to $1 billion contract

News of winning a large infrastructure contract wasn’t enough to help the Downer EDI Limited (ASX: DOW) share price buck the broader market decline on Thursday.

The Downer share price fell 1.5% in the last hour of trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index shed 0.6% of its value.

Contracts worth up to $1 billion just isn’t enough to excite investors anymore. Perhaps there is a fair bit of good news already in the stock as it’s trading close to a 10-year high.

Contract worth up to $1 billion

The engineering group announced today that it secured a 5-year contract worth $520 million to plan, design and deliver water and wastewater infrastructure for Logan City Council (LCC).

The contract has a provision to be extended by two years and that will increase the contract value to up to $1 billion.

Work will commence in January next year and includes infrastructure planning, community consultation and approvals, business case development, and design, construction and commissioning of water and wastewater assets.

Downer in a good spot

Downer’s long track record in working with LCC helped put it in a good position to win the new work. Its partnership with the council dates back to the Logan Water Alliance, which delivered $302 million of infrastructure from 2009 to 2014. It also worked on the Logan Water Infrastructure Alliance, which is delivering approximately $435 million of infrastructure between 2014 and 2020.

The latest contract is a big step up in value.

Half of the eight analysts polled on Reuters rate Downer a “buy” and the average price target of the stock is $7.91 a share. That’s a little below where the share price is currently trading.

Is the stock good value?

While Downer’s valuation is looking a little stretched, the outlook for the group is looking positive in light of the numerous infrastructure projects that state and federal governments are undertaking.

The group is also in the process of divesting its mining engineering business. It will be interesting to see what management does with the proceeds of the divestment as it could mean some form of capital return to shareholders.

Downer isn’t the only one in the sector that I think is worth keeping an eye on. Seven Group Holdings Ltd (ASX: SVW), which owns heavy earthmoving equipment, and oil and gas engineering group Worley Ltd (ASX: WOR) are also worth putting on your radar for 2020.

These 3 stocks could be the next big movers in 2020

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Motley Fool contributor Brendon Lau owns shares of Downer EDI Limited, Seven Group Holdings Limited, and WorleyParsons Limited. 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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