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Why the Downer share price tumbled today

The Downer EDI Limited (ASX: DOW) share price was among the biggest laggards on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index after it posted a big drop in first half profit.

Shares in the engineering and construction group slumped 2.7% to $7.27 on Wednesday when the ASX 200 jumped 0.5%.

The decline isn’t as bad as wooden spoon winner Blackmores Limited (ASX: BKL) or second worst performer Beach Energy Ltd (ASX: BPT), but the loss would still be disappointing to Downer shareholders as the stock suffered around a 20% de-rating since management issued a shock profit downgrade in late January.

Failed to inspire

Downer’s results were an opportunity to win back some support, but instead investors found more reasons to bail.

Management reported a 35.7% crash in net profit to $86.3 million while revenue inched up 2.9% to $6.5 billion for the six months to end December 2019.

The group stuck to its downgraded net profit after tax and amortisation (NPATA) guidance of around $300 million.

Trying to right the ship

Downer’s reassurance that it would look to further reduce exposure to risky construction project didn’t reassure investors much.

It’s cost blowouts on these projects that were the driving force behind January’s profit warning and management is focusing on winning more operational and maintenance work instead.

Best and worst

The engineering, construction and maintenance (ECM) division was the worst performer over the period as it suffered a loss of $37.4 million compared with a profit of $22.4 million for the same period last year.

The bright spots were its mining and transport divisions, which delivered higher earnings before interest, tax, depreciation and amortisation (EBITDA).

Will divestments save Downer?

Shareholders should also be relieved that Downer is holding its dividend steady at 14 cents per share, but this is unfranked compared to 50% franking for 1HFY19.

Downer is also taking a step closer to deciding what to do with its troubled engineering business and its laundries unit. Management said it received interest from potential buyers and may spin-off the businesses if it doesn’t get an appropriate offer.

Divesting the businesses could help trigger a turnaround as groups who undertake such an exercise often regain favour with the market.

Others struck by blowouts

Downer isn’t the only one that have been afflicted by budget blowouts on construction projects. Toll road operator Transurban Group (ASX: TCL) is in dispute with the Victorian state government over the $6.7 billion West Gate Tunnel.

Lendlease Group (ASX: LLC) and Cimic Group Ltd (ASX: CIM) have also gotten into strife while building infrastructure, which highlights the pitfalls of investing in the sector.

Australia may be in the midst of a so-called infrastructure construction boom, but this could lead to bust for some.

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Motley Fool contributor Brendon Lau does not own any shares mentioned in the article. The Motley Fool Australia owns shares of and has recommended Blackmores Limited and Transurban Group. 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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