Downer on the up

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Engineering, mining and infrastructure group, Downer EDI Limited (DOW.AX) has reported a 11% rise in net profit to $94 million dollars, despite an 18% rise in revenues to $4.7 billion, including joint venture and other income. Investors certainly liked the result, with the shares rocketing up by more than 15%, around midday.

All three divisions have seen rising revenues, with Infrastructure’s revenue jumping 25.6% to $2.2 billion, Contract Mining revenues rose 17.8% to $1.3 billion and Rail rose 27% to $730 million. Work-in-hand at the end of December was $18.9 billion, across all three divisions.

Downer has been awarded a number of significant contracts in the six months to December, including road and rail maintenance and civil construction work across most states, a long term contract worth up to $800 million to provide mining services at the Meandu mine in Queensland, as well as work on the National Broadband Network (NBN).

In the Mining division, Downer has several valuable, large long-term contracts including work on Fortescue Metals Group’s (FMG.AX) Christmas Creek iron ore mine, valued around $3 billion, a $900 million plus contract on the Boggabri coal mine, as well as a $2 billion contract for the supply of mining services to BMA – an alliance between BHP Billiton (BHP.AX) and Mitsubishi.

Shareholders will also be happy to hear that the company’s previously troubled Waratah Train project appears to be tracking well, with 28 trains out of a contracted 78 delivered and available for passenger service. The project is still expected to be completed at a $430 million loss.

Downer was upbeat about its full year results, forecasting net profit of around $210 million, with underlying earnings before interest and tax (EBIT) around $370 million, which suggests further improvements to come in the second half of the year.

Earnings per share came in at 21 cents and the company declared a 10 cent dividend, franked to 70%.

Foolish takeaway

Despite the rise in profits and the company’s upbeat forecast, Downer’s profit margin is very thin, at around 4.5%, much like other services companies including Transfield Services (TSE.AX) and United Group (UGL.AX). The failure of just one large contract can result in a massive loss or writedown and a falling share price, as we’ve already seen with the Waratah Project in 2011. Foolish investors will want a substantial margin of safety to invest in this high-risk business.

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