FN Arena News
Latest News
Asia
Australia
Commodities
Currencies
Economics
FYI
Sell&Buy-ology
Small Caps
Technicals
Weekly Analysis
Weekly Insights
Weekly PDF
Research Reports
Sources Of Wisdom

FNArena

Email Us

Member Login


Australia

Downer A Sector Stand-Out
FNArena News - September 19 2012

 - BA-Merrill Lynch reinstates coverage on Downer with a Buy
 - Attracted to improved balance sheet and exposure to diverse markets
 - Brokers assess the sector



By Chris Shaw

Having not covered engineering company Downer EDI (DOW) for some months, BA Merrill Lynch has re-instated coverage on the company with a Buy rating and $4.70 price target. This brings to seven the total number of Buy ratings on Downer EDI from brokers in the FNArena database, compared to a single Hold rating courtesy of UBS.

For BA-ML, part of the attraction of Downer at current levels is a strengthened balance sheet, as a combination of asset sales, solid execution and working capital management has left debt ratios well below covenant levels. As BA-ML notes, even allowing for the capital intensive nature of Downer's business, the improved balance sheet opens up scope for the resumption of dividends in FY14.

As well, Downer is moving beyond some legacy contract issues, something BA-ML expects will help boost returns going forward. A recent site visit gives greater confidence in this regard, as Deutsche Bank noted Downer has achieved some improvement in both production and quality at its Cardiff rail facility. This improvement led Credit Suisse to suggest there was potential for some new contract wins with the likes of Railcorp.

The other attraction for BA-ML is that Downer has a strong level of work in hand and operates in diverse end-markets. This means exposure to any one sector of the economy is limited. A particular advantage in Downer's case is there is less exposure to leveraged resources capex.

As BA-ML notes, only around 20% of Downer's work in hand is based on resouces capex, the remainder being split across contract mining at about 35% and and civil services and construction at around 45% of current work in hand.

Given Downer has had some issues with respect to project completion in recent years, which BA-ML notes prompted some changes to senior management positions in FY10, the consolidation of operating companies and a greater focus on risk management is comforting.

Execution remains a key variable for earnings, as BA-ML notes a 1% improvement in margins adds around 5% in return on equity terms. Such an improvement would lift Downer's returns to near the top of its peers on the numbers of BA-ML.

The full story is for FN Arena subscribers only. To Subscribe click here

Or If You're New To FN Arena - click here for a trial

If you are a subscriber login here


Member Login

Username: Password:
Remember Me Lost your logon details?








Our archive tells no lies. FNArena warned its readers well before the price of crude oil peaked in 2008 the speculator bubble would deflate with devastating consequences for those holding oil company shares. In August we warned the most severe correction in modern history was forthcoming for natural resources. In 2007 we warned the problem with US subprime mortgages would prove much bigger than experts and media were anticipating (among other things).

FNArena is showing the true value of truly independent financial analysis and reporting. Our daily news reports can be trialed at no cost and with no obligations at www.fnarena.com. Simply sign up and see it for yourself.

Subscribers and trialists should read our terms and conditions, available on the website.

All material published by FNArena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.


The content of this information does in no way reflect the opinions of FNArena, or of its journalists. In fact we don't have any opinion about the stock market, its value, future direction or individual shares. FNArena solely reports about what the main experts in the market note, believe and comment on. By doing so we believe we provide intelligent investors with a valuable tool that helps them in making up their own minds, reading market trends and getting a feel for what is happening beneath the surface. This document is provided for informational purposes only. It does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. FNArena employs very experienced journalists who base their work on information believed to be reliable and accurate, though no guarantee is given that the daily report is accurate or complete. Investors should contact their personal adviser before making any investment decision.
© News Network 2014. All Rights Reserved. No portion of this website may be reproduced, copied or in any way re-used without written permission from News Network. All subscribers should read our terms and conditions.