With rail woes receding, Downer builds investor confidence

INVESTORS in Downer EDI have been buoyed by the contractor's optimistic earnings outlook and its decision to resume paying dividends for the first time in two years.

Downer delivered a net profit of $94 million for the six months to December 31, a 10.8 per cent rise on last year.

It expected a net profit of about $210 million for the full year, and underlying earnings of about $370 million because of solid growth in its mining and infrastructure division.

The outlook came in slightly above analyst expectations, pushing shares in the company up as much as 80¢, or 16 per cent, to $5.66 in early trade on Thursday. The gains were pared back, with the shares closing 38¢ higher at $5.24 - the highest closing price since May 2010.

"The business has performed very well over the past six months," Downer chief executive Grant Fenn said. "Each of our three divisions achieved substantial revenue growth."

Like fellow contractor Leighton, which reported on Wednesday, the share price surge demonstrates a return of investor confidence in the company, which had been responsible for several unwelcome surprises.

The weak link in the group has historically been its rail division, with profits savaged by lengthy delays and cost blowouts to its Waratah rail contract, a $3.6 billion deal to deliver 78 new trains for Sydney's metropolitan rail network. The project is still expected to incur a $430 million loss.

Downer had signalled it would move out of rail manufacturing to focus on the less capital intensive area of rail fleet maintenance.

Downer incurred an $11.5 million provision related to a dispute over the construction of an electrical services tunnel in Singapore.

The group declared an interim dividend of 10¢ a share, 70 per cent franked.

Morningstar analyst Ross MacMillan said Downer had performed particularly strongly in its infrastructure division and that the resumption of dividend payments showed management was confident of the group's future.

Downer also announced it had been awarded a contract worth $94 million for the rollout of the national broadband network.