Downer EDI
Recommendation
Downer EDI’s 2012 result looks encouraging at first, with revenue rising 23% and underlying net profit up 17%, but suspicions are raised by the board’s decision not to pay a dividend (again).
Digging a little deeper, you can see why. Gearing of 20% is high for such a capital intensive business, leaving a net interest bill that was higher than free cash flow and was covered only 5 times by earnings before interest and tax. And this was in a year of record revenues and underlying profit.
Analysts are betting on even better years in 2013 and 2014, bringing the prospective price to earnings ratios down to 7.4 and 6.8 respectively. But we’re still not interested. This is a capital-intensive business reliant on large, complex and often very risky contracts. Things can go wrong very quickly, especially where there’s a lot of debt. AVOID.