Downer EDI Ltd (ASX: DOW) shares have enjoyed a growth rally during the first six months of 2025 following robust half-year earnings and positive market sentiment.
The company's shares are trading at $6.40 a piece as of this afternoon, up 20% since January and 36.75% higher for the year.
The share price has risen 24% over the past 3 months alone.
In May, Macquarie Group Ltd (ASX: MQG) identified Downer as a company sitting on excess franking credits and a pile of cash, with capacity to increase its dividend yield.
Macquarie analysts noted there is a potential likelihood of capital return for Downer in the form of Special DPS or Buyback.
The company currently has a 1% franking credit balance as a percentage of market cap and holds 19% excess cash.
Analysts also believe the company may retire its high-cost Downer ROADS security division.
Here's the broker's latest stance on the stock.
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What's ahead for Downer shares?
In a note to investors on Wednesday, Macquarie said it maintains its neutral rating on Downer stock, but has revised its target price to $6.50 a share, up from $5.73 earlier this year.
The new target price represents a potential 1.56% upside from the current trading value.
The broker's neutral stance is mostly due to softer revenues across markets in Victoria and New Zealand. It raised the target price to reflect FY26 estimated earnings versus the FY25 estimation previously.
The business has announced a number of asset sales in recent months, including sales of Laundries for $64 million (pre-tax) and 49% Keolis Downer (KDR) for $65 million (pre completion adjustment).
The sales result in lower revenue, but Downer's margin has been enhanced by low levels of profit on divested assets (e.g., DOW's share of KDR NPAT only $2.6m in FY24 on $682m rev share).
As previously announced, Zinfra is assuming an Ausnet power maintenance contract in August 2025 (circa-$200 million FY revenue impact for DOW but limited EBIT contribution), the broker explains.
"We est reduction of $500m in low margin rev is in itself c20bp margin accretive."
The broker added that Downer has undergone significant transformation over the past two years with a back-to-basics approach.
"DOW is targeting >4.5% EBITA margin as an avg across FY25/26 which implies c4.8% margins in FY26e (consistent with our fct)," the note said.
"Key drivers incl further benefit from $200m cost-out program, delivered margins closer to tendered margins, more selective bidding & less profitless revenue via asset sales."
