Time to look at the upside of DownerDAVID SYMONSJuly 15,...

Time to look at the upside of Downer
DAVID SYMONS
July 15, 2010

Engineering group Downer EDI has had a rough trot since the June 1 announcement of delays and provisions associated with the Waratah trains project.

However, there's an increasingly prevalent view that the resultant share price drubbing was overdone. Downer shares fell from $6.29 before the downgrade to a low of $3.33 earlier this month.

Merrill Lynch and Citigroup have published reports highlighting value at current levels, while Wilson HTM's recent Alchemist newsletter to institutional clients concluded that, when compared with the amount of business that Downer has on hand, the stock looks grossly mispriced.

By way of comparison, Wilson looked to UGL, where work in hand of $8.8 billion represents 3.8 times the company's $2.28 billion market capitalisation. UGL has a similar spread of business to Downer, with involvement in mining contracting, rail manufacture, infrastructure, roads and telecommunications.

The market is very much more cautious when valuing Downer's work in hand. Based on the Downer share price late last week, work on hand of $16.7 billion stood at 13 times the market capitalisation.

Of course, the profitability of the contracts and the level of gearing in the company mean that comparing work in hand with market cap is only a crude measure of valuation. Nevertheless, Wilson concluded that a $7 priced target looked achievable in the medium term.

At that price, Downer would still be priced at a discount to UGL, with a work in hand multiple of seven times. Downer shares closed at $4.16 yesterday, up 5 per cent.

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