Investors in Australia's engineering services stocks will be gritting their teeth as Downer EDI Limited's (ASX: DOW) full year result poured cold water on any prospect of a near-term recovery for the industry.
Shares in Downer led the sector lower with a 9.8% plunge to an eight-month low of $4.13 in morning trade when it warned of lower earnings this financial year after posting a 2.7% drop in net profit to $210.2 million and a 4.8% decline in revenue to $7.02 billion for the year ended June 30, 2015.
Downer's peers are falling in sympathy with Monadelphous Group Limited (ASX: MND) tumbling 2.8% to $7.73 and UGL Limited (ASX: UGL) shedding 2.2% to $1.82.
It wasn't Downer's 2014-15 results that sparked the sell off as its earnings and final dividend of 12 cents a share were largely in-line with consensus forecasts. It was what management had to say about 2015-16 that spooked investors.
Net profit for the current year is expected to fall 9.6% to $190 million and this could be worse if it loses the bids for the inter-city fleet project in New South Wales, the next generation trains in Victoria and light rail project in Canberra. This is because the costs of the bids have yet to be expensed.
In contrast, analysts polled by Reuters were tipping a tiny 1% dip in earnings for 2015-16 but a 1.7% rise in revenue to $7.59 billion.
Those hoping for some stabilisation in demand for services in the mining sector would be disappointed too as management doesn't see any light at the end of the tunnel with the low levels of mining related expenditure expected to persist through 2016.
If there is a silver-lining, it can be found in its earnings before interest and tax (EBIT) margin. The 0.3 percentage point dip in its mining business margin to 8.3% is not so bad given the challenging conditions facing the industry in light of the crash in commodity prices.
Further, EBIT margin for its rail division jumped 0.9 percentage points to 3.1% while margin for its infrastructure division inched up 0.1 of a percentage point to 4.1%.
Downer also has a reasonably healthy balance sheet with a cash balance of $372 million and undrawn debt facilities of $610 million.
The stock will probably stay out of favour over the medium term unless it wins the rail projects, but the bad news is largely reflected in this morning's share price crash.
There no doubt that Downer is facing consensus downgrades but I suspect the stock will be trading on an undemanding 10x price-earnings for 2015-16 post downgrade.
However, I think it's too early to bargain hunt the stock as trying to buy Downer now would be akin to trying to catch a falling knife.
If you are looking for stocks with a more certain growth outlook, sign up below to get your free report on two small cap gems that the experts at the Motley Fool have uncovered.
