Why this fund manager tips Downer EDI (ASX:DOW) as the share to own in 2021

With the new year, many ASX investors look to add new shares to their portfolios. Here's why 1 fund manager likes the Downer share price.

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After ringing in the new year, many ASX investors are looking to add new shares to their portfolios. And perhaps sell some they believe will underperform in 2021.

We'll let the potential underperformers rest for today. Instead we turn to a share that Centennial Asset Management's Matthew Kidman believes could lead the ASX charge higher in the year ahead.

Namely, Downer EDI Limited (ASX: DOW).

Why Downer is tipped to outperform in 2021

If you're unfamiliar with Downer EDI, the company designs, builds and sustains assets, infrastructure and facilities in Australia and New Zealand. It operates across a range of industries including transport, utilities, mining, engineering and construction. Downer is part of the S&P/ASX 200 Index (ASX: XJO).

In an interview with Livewire Markets last week, Matthew Kidman explained why he likes the outlook for Downer shares in 2021. Kidman said that Downer was in the middle of restructuring its business:

It's selling its lumpy, heavy capital intensive components, and going into a much more capital-light service-based business with a lot of long-term government contracts.

It's really unloved by the market and it's trying to fix itself up. It's fixed its balance sheet, it's fixing its business mix up. I think it sits alone as a service-based business for that mid to large-cap market.

As they see it unwind some of these businesses and focusing on the better-returning businesses, it will get a re-rate. So today, around $5.30, I think it can trade on a slightly higher multiple. With that multiple expansion, the earnings will go up. I think over the course of the next few months they may be able to get around $7 out of it, as long as the story unfolds the way we think it will.

Downer share price snapshot

Downer shareholders were absolutely hammered during the wider COVID-19 market selloff last year. From 21 February through to 24 March, the Downer share price crashed 69%.

Since that low, shares have rebounded an impressive 103%. But that still leaves the share price down 37% since 21 January last year.

Downer trades at a trailing price to earnings (P/E) ratio of 12.4 times. The company pays a dividend yield of 2.4%, unfranked.

The Downer share price gained 0.9% today, closing at $5.53 per share.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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