Investors in UGL Limited (ASX: UGL) have enjoyed a profitable half-year despite huge provisions and impairments impacting the company's financials; towards the end of November, shareholders received $3 per share in distributions from UGL's sale of its DTZ businesses.
Unfortunately since then, shares have sagged from average prices of around $2.70 to today's level of $1.96.
The decline appears to be partly due to sentiment, with a decline in the resources sector and a $175 million provision for contract losses on the Icthys Power Plant project.
A number of director retirements, a resignation and appointment of a new CEO throughout October and November may have also contributed to investor concerns.
Here are UGL's latest half-year results – let's take a look to see if the price fall is well founded:
- Revenues from ordinary activities rose 8.5% to $1.007 billion
- Losses from ordinary activities were down 515.2% to $122 million
- Underlying Net Profit After Tax of $29.3 million
- No interim or final dividend this year
- $79 million cash at bank
- Full business review underway; further market update planned for May 2015
It's not a pretty report by any stretch of the imagination.
Even using UGL's preferred Underlying NPAT measure of profitability, $29.3 million represents a tiny percentage of $1 billion in revenue and indicates just how much margin pressure is currently facing engineering companies in Australia.
UGL recently won an LNG maintenance contract (also announced this morning) which indicates it still has a competitive offering, and is trading on a very low Price to Earnings (P/E) ratio which may attract bargain hunters, but I have to advise investors to steer clear of this sector.
There is simply no compelling reason to invest in any company in a sector (engineering and mining services) that is under such severe earnings pressure.
Even if UGL was the best company in the entire sector, it is competing for slices of an ever shrinking pie and worse, faces heavy margin pressure in a 'buyers' market' for engineering services.
Sure, everybody loves the idea of picking a company when it bottoms out and enjoying the subsequent rise in value, but let's be honest – you're probably not the investor that's going to successfully pick it.
Furthermore recent evidence suggests that the bottom may still be some way off, which does not bode well for your hard-earned cash.
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