Stocktake: Ride The Gravy Train With Downer Edi

Sun Herald

Sunday September 7, 2003

JOHN SYNNOTT

What's driving the share price?

Danny Younis of Aegis Equities: The acquisition of Singapore's public works department, CPG Corp, which provides the necessary leverage to augment Downer's assault in Asia. Second, the divestment of several non-core assets. Third, solid 2003 earnings. Finally, major shareholder Hutchison Whampoa 's earlier decision to sell down its 10 per cent stake to institutional investors.

Alex Mees of UBS: In the past week or so, Downer's share price has reacted positively to a strong result for the year to June 2003 and the announcement of $130m of new project work in CPG Corporation.

What's the best thing going for it?

Younis: A $6 billion order book, strong balance sheet and robust cashflows, with management targeting 15 per cent sales and earnings growth this year. Global trends for increased outsourcing.

Mees: The diversification of its exposure to various industries and countries as well as its strong order book.

What are the big risks?

Younis: Margin erosion, notably in rail. The expansion into Asia facing aggressive pricing pressures from Chinese entrants and tightening construction activity. The Millennium train debacle may continue to impact short-term. High percentage of spot contracts in NZ.

Mees: Execution of contracts will always be the largest risk to Downer EDI and the EDI rail division is currently facing some challenges with the resolution of difficulties with the Millennium train project.

What's the three-year outlook?

Younis: Positive. The company is well positioned to capitalise on the high-return facilities management and maintenance sectors. The forecast upturn in engineering, mining and resources, and infrastructure activity in 2004 and 2005 will also be catalysts. Forging further alliances and joint venture arrangements should minimise earnings risk.

Mees: The outlook is for continued growth in activity, boosted by a significant contribution from CPG.

Is it a buy or sell?

Younis: Buy. It's our pick of the contractors ahead of competitors Leighton, United Group, Abigroup, Henry Walker Eltin , Transfield and Clough.

Mees: Hold. We have a 12-month price target of 90 cents a share.