The Downer EDI Limited (ASX: DOW) share price has made a positive start to the week, rising by 2.53% to $4.46 at the time of writing.
The gain comes off the back of an announcement to the market this morning that the engineering contractor had been awarded a long-term contract with NBN Co Limited.
Let’s take a look at the details of the deal, and why I think Downer is a company to keep an eye on.
What did Downer announce?
According to the release, Downer has been awarded a unified field operations contract with the NBN at a value of $320 million, to take place over the coming 8 years.
The contract is expected to begin in September 2020 for an initial 4-year term, with 2 further extension options of 2 years apiece.
Downer will provide services to the NBN including network restoration, copper rehabilitation, alternate power system activities, network performance and capacity enhancement, urgent field service work and site maintenance across Western Australia, South Australia, and the Northern Territory.
Notably, this latest deal with the NBN further bolsters Downer’s reputation as a leading provider of fixed and wireless network services both in Australia and New Zealand, and a key contributor to the construction of the NBN more broadly.
In commenting on this morning’s news, Downer CEO Grant Fenn added:
A lot of NBN construction work is coming to completion and Downer is now transitioning to delivering NBN maintenance services. We look forward to continuing our partnership with NBN and optimising the national broadband network.
Is the Downer share price a buy?
Despite posting a net loss after tax of $150 million for FY20, I’ve been a fan of Downer for a while now. My thesis for the company is largely owing to their recent shift towards government and other large-scale contract work.
Examples of this include a $324 million contract in the power generation, oil and gas sectors and a $420 million contract with the South Australian government for road maintenance, both announced in July.
These new contractual agreements add to the current portfolio of Downer’s projects, which includes the delivery of the Auckland City Rail Link, railway vehicles including the Sydney Waratah and Melbourne Metro train fleets, and light-rail projects in Parramatta and the Gold Coast.
Participation in these larger projects will likely provide a robust source of recurring revenue over the long-term, which is a positive for Downer’s shareholders. Boasting a trailing dividend yield of over 6.1% on current prices, this company also has a track record of providing decent payouts.
In terms of potential headwinds facing the Downer share price, the company’s ownership of Spotless Group continues to cause it liquidity headaches, and its recent need to raise $400 million in equity to strengthen its balance sheet and buy out the remainder of Spotless suggests COVID-19 has left a sizeable hole in Downer’s coffers.
Foolish takeaway
It’s great to see Downer has plenty of new work on its plate, and I like that the revenue earnings from these projects are being spread out over a long-term horizon. The NBN deal is another notch in its cap. Let’s see whether the Downer share price has further room to grow moving forward.
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Motley Fool contributor Toby Thomas has shares in Downer EDI Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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