Downer EDI Limited (ASX: DOW) and Service Stream Limited (ASX: SSM) are the "key winners" from the Australian Department of Defence's allocation of base services tenders last week, RBC Capital Markets says, adding both represent good buying at current prices.
The Department last week awarded several billion dollars in contracts for base transformation and maintenance works over the next six years for the initial contract terms. Service Stream was awarded contracts worth $1.6 billion, Downer contracts worth $3.05 billion, and Ventia Services Group Limited (ASX: VNT) contracts worth $2.7 billion.
RBC Capital Markets analysts said in a note to clients that while Ventia won work under the new contracts, it would now operate in fewer regions.
Downer, on the other hand, would book more revenue compared with its previous Defence contracts, "with an improved mix of work now weighted entirely to Hard Facilities Management which we see favourably''.
Service Stream as a non-incumbent operator achieved an outcome in excess of our and market expectations with estimates of about $240 million per annum top-line contribution during its first full 12 months. Whilst being disappointed by missing out on contracts where it is the incumbent operator, Ventia retains Western Australia, amongst other states – particularly relevant given the investment expected at WA's Henderson Defence Precinct.
RBC has a target price of $7.75 for Downer stock, compared with the current price of $7.21, and a target price of $2.50 for Service Stream, compared with $2.31. Its target for Ventia is $5.50, down from $5.75, compared with the current price of $5.12.
Wins could lead to more work
RBC analysts said winning the tenders positions the companies well for new works that might be needed across the bases. Defence "as a thematic remains attractive" with the Australian Government looking to ramp up spending in the area.
Service Stream's wins in the Northern Territory and South Australia were particularly positive, as the company was not previously a Defence supplier.
On top of winning new work with a highly sought after customer – Defence, the significance of this in our view is that in its key publication – Integrated Investment Program (2024), Defence highlighted its Northern Bases as being a priority for further development & investment; specifically, NT located bases. Additionally, Osborne Park in SA must be expanded to enable Defence to construct Australia's AUKUS submarines. With that, we believe NT and SA should present further, incremental project work opportunities which Service Stream will be geographically well-positioned to participate in.
