As with many parts of Australia’s economy, COVID-19 and wet weather have been significant impediments to normal operating cadence. Downer is confident it can catch up on the deferred work and, ironically, the additional remediation work required due to flooding.
Wet weather has been as damaging to DOW’s operations as COVID. The good news is that the ~$80 million EBITA impact on the FY22 result should mostly be clawed back in FY23f, subject to the weather, of course. The early months of FY23 have not been co-operative in this regard, but on the bright side, there is a significant amount of road repair work to be done across the country. In NSW, DOW will be happily supplying as much high recycle-content asphalt from its new Rosehill facility as possible – annual capacity is 550kt.
In his CEO address, Grant Fenn pointed to DOW’s prowess in the technical design and construction of power transmission and distribution networks. In the context of Australia’s energy transition, DOW is in the thick of the engineering capability that is required to make the transition a reality. This should be a multi-decade growth platform for DOW.
DOW has $36.1 billion of work-in-hand. There are many opportunities to add to the pipeline such as new trains in Queensland, telecommunications work for NBN Co, power transmission work in New Zealand and a vast array of government contract work. In fact, 90% of DOW’s work is government-related so unless the fiscal brake is pumped hard by the current government, DOW will have a plentiful workbook to manage.
Investment View
DOW’s FY23 net profit guidance of 10-20% growth, was provided at the August annual result announcement. There was no update to this at the Annual General Meeting, but the inevitable warning about on-going wet weather disruption was mentioned. Labour supply also remains an issue of concern, but both these factors can eventually turn in DOW’s favour. We prefer to look at the frustrating period of wet weather as deferred work, rather than lost earnings.
We reiterate that DOW’s balance sheet has net debt to EBITDA at 1.1x FY23f based on consensus forecasts. This is well below the company target range of 2.0-2.5x leaving room for the Board to consider capital management or accretive acquisitions. DOW could also be contemplating a sale of its Transport Projects that might be worth ~$100-150 million.
The stock remains underappreciated for its improved asset base and the extensive pipeline of infrastructure work it currently has and can accumulate.
Risks To Investment View
Earnings would be dented if the economic infrastructure plan did not play out, or if COVID impacts and prolonged wet weather continued to disrupt operations. We rate these risks as relatively low probability.
Recommendation
We have retained our Buy recommendation.
