Here’s why UGL is up 6.4% in the past two weeks

Here's why UGL is up 6.4% in the past 2 weeks

Business sale opens up opportunities, may be start of industry consolidation.

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 June 17, 2014 2:06 pm AEST

What: There's been a little ray of sunshine for engineering and property service company UGL Limited (ASX: UGL) amidst a down-trodden industry. Over the past two weeks the stock climbed 6.4% to $6.98, while the S&P ASX 200 Index (ASX: ^XJO) headed down about 1.5%.

So What: Here's the reason for the quick jump up and what it means for the company.

– Sale of DTZ

The company operates a property service company called DTZ, which it acquired in 2011. It is an international business that attracted immediate attention when UGL decided to sell it. A demerger and separate listing was considered, but in the end a trade sale was deemed quicker.

Already the private equity group TPG has agreed to buy DTZ for $1.2 billion. Of the proceeds, the company should have about $1 billion in cash.

The sale may start a consolidation phase within the engineering sector, which has been depressed since the mining pullback. Engineering and construction giant Leighton Holdings Limited (ASX: LEI) is planning to sell its John Holland subsidiary, so there could be more sale and takeover activity on the way.

– Paying down debt

The company said it will pay down debt with part of the sale funds. Currently, it has about $650 million in net debt, yet it plans to leave some debt and improve its cash position. In FY 2013, it had an underlying net profit of about $92 million, so a much lower debt level would make it financially stronger to weather current industry conditions.

Note: Foolish readers should always gauge how a company can cope under financial stress. Some of the best signs are low debt, ample cash positions and fat profit margins.

– Changing the company

A new CEO, Ross Taylor, has been appointed and will take over the role in November. Just like the management change currently occurring at Leighton Holdings, the appointment may bring on further changes in business structure and cost savings. Improving operating earnings could flow into better net profits.

2 top ASX shares Warren Buffett would love…

UGL is getting more contracts, such as with the big Roy Hill iron ore mine project in WA and the Ichthys LNG project in NT, so there are some good signs for the company. However, this kind of business probably wouldn't be on the buy list of multi-billionaire Warren Buffett. Profit margins may be too low for his liking and capital intensive businesses demand a lot of investment money.

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