DOW

Downer is an acceptable quality services company. Margins are typically low, but contracts are long dated, usually not overly complex, cost + type structures (carrying little “existential risk” from complex engineering projects on a fixed price lump sum basis) with some modest inflation protection from periodic resets.

Those general predictable revenue streams are not especially capital intensive, and as such DOW tends to produce quite good free cashflows.

However, they aren’t totally immune from higher wage pressures, and DOW is a labour intensive business, something that management drew attention to at the call.

They’ve also been affected by COVID, as workers isolate, projects get put on hold, and partners (as DOW works collaboratively with clients) who have also had staffing shortages, which has a downstream impact on Downer.

Skipping to the punch line, the DOW results outlook statement is quite underwhelming, and vague for this stage of the pandemic.

Image

It also appears to be a sizeable miss to consensus.

Image

The stock had traded (over the past year) quite well, often held out as a market favoured industrial. We’d viewed the stock as somewhat expensive, given the generally average quality, and modest operating leverage, and noted the stock had been derating ahead of the result, putting back on our radar.

Certainly, relative to DOW’s history, the stock isn’t all that cheap, although in absolute terms the yield is not unattractive, and relative to a) the broader industrials sector and b) the broader benchmark, is reasonably priced.

The balance sheet is also in good shape, with recent divestitures set to take gearing down to 19%.

We’d suggest it will trade quite weakly today, based on the seeming miss to consensus.

[EDITit did initially trade weakly, but recovered to trade only slightly down. That suggests the market had in mind more pronounced COVID impacts, and more pronounced wage inflation, than the actual outcome].

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Receive our investment insights

Something went wrong. Please check your entries and try again.