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Profit upgrade and higher dividend couldn’t save Downer EDI’s share price from crashing

Brendon Lau
Bull Bear

It’s not easy to stay in investors’ good books. The Downer EDI Limited (ASX: DOW) share price crashed today even as management upped its profit guidance, posted strong earnings growth and increased its dividend payment.

But that wasn’t enough to keep shareholders onside as the DOW share price was sold off by 4.2% to $7.24 – making it the worst performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) during lunch time trade followed by the AGL Energy Limited (ASX: AGL) share price, Saracen Mineral Holdings Limited (ASX: SAR) share price and Coca-Cola Amatil Ltd (ASX: CCL) share price.

Downer may have been a victim of buy-the-rumour, sell-the-fact. Shares in the engineering and construction group had rallied hard with the stock surging more than 25% in the past two months to hit a four-month high of $7.56 yesterday.

Fly in the ointment

A lot of good news was already priced in and news that Downer’s first half net profit from ordinary activities had swung sharply into the black ($134.2 million vs. a loss of $11.2 million in 1HFY18) just wasn’t enough to keep the stock flying higher.

Management also increased its interim dividend by a cent to 14 cents a share and upped its net profit after tax and before amortisation of acquired intangible assets (NPATA) guidance to $352 million for FY19, or around 5% ahead of its previous forecasts.

But the higher guidance was due entirely to the asset revaluation from Downer buying over the 50% in its Downer Mouchel joint venture business.

What’s more, its engineering and construction business went backwards, the company doesn’t seem any closer to resolving its problematic Royal Adelaide hospital contract, and some investors may be disappointed that Downer didn’t announce the sale of its capital-intensive and underperforming mining services division.

If anything, Downer said it was keeping mining services – at least for now.

Buying opportunity

But I think the share price fall is a buying opportunity as I can’t find anything sinister behind today’s profit-taking.

Downer is one of the best ways to gain leverage to the infrastructure boom and announced a new $900 million contract with the New South Wales government to provide 17 additional Waratah trains.

It also owns one of the country’s largest non-government road infrastructure services businesses at a time when the federal and state governments are pouring billions into maintaining and building roads and highways.

The stock isn’t expensive either. Ignoring the profit guidance upgrade, the stock is trading on a FY19 price-earnings multiple of around 14 times.

That’s inline with the market average but Downer should be trading at a premium given that it’s well placed to deliver double-digit earnings growth over the next 12 to 24 months.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Coca-Cola Amatil Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019