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DSD

15,975 Posts.

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18/08/15

12:52

Post #: 15826105
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Originally posted by DSD ↑

MND with a mkt cap 2x that of UGL has surged almost 10% this morning after mkt went for its yr end result in a big way. I'd been fortunate to buy MND 2 wking days earlier despite being uber bearish re energy stks and engineering companies dependent on resources and oil&gas. That's because MND had been smashed down to $7.20 by sector fear/bearishness and in general i agree lower prices are justified.

But mkt ignored facts that:
a) MND had already reduced staff by 1,000men and the redundancies had long been accounted for.
b) Starting 12-18months ago MND focused on moving away from construction projects in MS field into maintenance contracts and civil infrastructure, and water provision in particular.

So when today's result came out the reaction was instant and massive. I had bought in hoping for/expecting exactly this to occur. But what did surprise me is that Mr Mkt is unpeturbed by the litigation MND faces on a couple of projects ut has built. MND intend to fight these claims and i have little doubt they will win.... but the whole court process is tiresome, expensive and distracting. Look at the chart and you'll see how sharp drops in SP coincided with news re these claims and the result was MND was massively oversold.

So what has this got to do with UGL? Under Richard Leupen UGL got into MS sector at exactly the wrong time. It chased projects and made zilch. Even worse it has a claim from a large Korean outfit regarding a JV power station built at a monster project in NT. UGL have protested saying the claim is unfounded... and they are probably right. It seems that foreign companies who have commissioned LNG plants, oil platforms etc when prices were double what they currently are are livid and attempting to claw back some of the costs. Will UGL and US partner negotiate a settlement or fight in court? IMO it doesn't really matter. But meantime the SP has been smashed from $2.80 to 1.70.

But look past the Ichthys dispute. UGL have an order book (not the useless 'pipeline' BS most companies refer to) of 5,100million. MND don't give details re their order book but talk about 450m in 'new projects'. I'm guessing current OB of around 860-900m. That's just one sixth the size of UGL's. ( bear in mind UGL OB spread across 3 yrs).

Yet UGL mkt cap of 283m just 42% that of MND. Mkt today has made a fuss of MND's move into more sustainable wk as outlook for MS and energy remains dire... probably for yrs to come. Yet UGL's wk is even more sustainable and longer term.Much of it revolves around train services, a sector UGL has been involved for over 25 yrs. It's a sector that is dominated by just 2 playersUGL and DOW. Leighton tried to break through 5 yrs ago and got their ass whipped by these old hands.

FY16 revenue is expected to be 2,400m of which 1,735 is committed. Just under half is from rail(state govt) and defence(Fed govt) contracts. Plus a decent chunk of the remainder is maintenance and shutdown wk in energy and resource sector... and not the disastrous construction segment. Under the 'asset services' segment '93% is recurring' rev. Altogether for FY16 55% of wk is deemed 'recurring'.

Management estimate EBIT margin of just 3% for FY16. That's 72m. They say 4% for FY17 so about 90m. I'm not sure how to calculate tax as dispute makes everything complicated but in a 'normal situation' it puts UGL (very roughly) on a PE of 5.5 (F16) and 3.5 (FY16). But i also reckon new CEO is being conservative and these margins could well be 10% higher i.e. 3.3% and 4.4%. That means PE 5.0 and 3.0.

MND went through the roof today despite disputes with client. Yet UGL has a far bigger order book and much of it in a safer (govt) sector. Assuming the Itchys dispute is settled then i reckon UGL will leap... possibly double the 10% seen by MND today.

Readers need to study the 80 page update (01/06) on UGL website and reach yr own deductions/decisions. My summary is pretty rough and mistakes will have been made. but overall i rate UGL at $1.70 and lowish-med risk/high-v.high reward play. MND has been a far better managed company than UGL and has a better workplace culture. But new CEO Ross Taylor recognises this and is making strides to fix the many problems. I see brighter days ahead.

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I'd be interested to hear TokyoJonny's take re UGL.

UGL Price at posting: $1.70 Sentiment: Hold Disclosure: Held
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