UGL has a better future with a split-up

Which part of the demerger would be better to own?

Darryl Daté-Shappard

I started investing after finding a copy of Peter Lynch's "Beating the Street" in the English book section of a library in Japan, where I was living at the time in 1997. Seeing that regular people can find investment ideas just as easily as professionals, I used the philosophy of that book to invest in stocks in Japan, and later in Australia after moving in 2001. I also have experience in property investing, and went on to complete my masters degree in Applied Finance at QUT in Brisbane. I follow the investment style of Peter Lynch, Phillip Fisher and Warren Buffett-- knowing what you invest in, doing your homework to keep up with a stock's story and holding a healthy skepticism of what the stock market calls "value".

Published August 13, 2013 9:59 am AEST

UGL (ASX: UGL) released its 2013 Annual Report, and, no surprise, profits were way down to $36.5 million from $134.3 million in 2012 because of the slowdown in the mining industry and infrastructure companies in general cutting back on their projects and maintenance work.

The bright spot in the report was the DTZ Property service division that had both increased revenues and profit. It now makes up 46% of total revenue and 58.2% of EBIT.

Source: UGL Limited Annual Report 2013

This is probably the reason that the company itself is now moving forward with plans to separate DTZ from the rest of UGL, and have two ASX-listed companies. It estimates the demerger will be complete in 2015. As heavy industry is slowing down, real estate markets are improving in the US and other international regions. DTZ has a long history in real estate, and UGL sees that by unleashing it from the engineering side of the business, more value can be created for shareholders.

Yet if you were a shareholder, which part would you rather keep — both, part or none? UGL Engineering and Operations & Maintenance had revenues of $2,060 million (54% of total) and EBIT of $81.6 million, generating a profit margin of 3.96%. DTZ Property had revenues of $1,755 million (46% of total) and EBIT of $113.5 million, generating a profit margin of 6.46%. Assuming that both parts maintain the 70% dividend payout, the dividend from DTZ will be higher.

The annual report views the next year as being roughly in line with this year's, yet acknowledges that property prospects are growing as the international markets improve. Greater market expectations may drive up DTZ's post-demerger market capitalisation, which in turn means a greater future share price. If mining, commodities and heavy infrastructure industry don't improve sufficiently, it should be an easy decision.

Foolish takeaway

People break up for a reason, and so do companies. Even UGL sees the company will be better off if the better performing part goes out on its own.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.

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