United Group Limited: Business as usual Last Traded: $14.27 Market Cap: $2,276M Sector: Industrials Summary of report dated 18/08/09 ACCUMULATE / MARKET PERFORM Valuation: $12.70 Event „o United Group Limited (UGL) reported FY09 NPAT (pre amortisation) of $150.3m, up 10.4% on pcp and in line with our forecast of $149.9m. Implication „o Margins contracted: EBITDA margins have contracted more than we and the market expected (EBITDA margin of 5.7% vs CBA 6.1%). Penalty payments in Rail continued to depress margins. The Services business also reported margins well below our forecast, impacted by the loss of high margin transaction business but also by reduced discretionary spend in UNICCO, which was worse than we expected. „o Resources holding up surprisingly well: Despite the drop-off in mining activity since late last year, the Resources segment recorded 11.4% EBIT growth. Impressively, the business is expected to be flat to slightly positive in FY10 despite not factoring in the Moranbah contract. „o UGL is losing rail wagon market share to BKN: UGL‟s FY10 orders of 500 wagons (down 50% from last year) are well below our estimate for Bradken (BKN) of at least 1,200. Typically these two players have had an equal market share. We expect that UGL‟s delay in establishing its offshore manufacturing is contributing to a lack of competitiveness when compared to BKN and imports from China. Earnings and valuation revisions „o Our EPS forecasts are down 2.9% in FY10, 4.0% in FY11 and 0.1% in FY12. The earnings revisions are driven by lower EBITDA forecasts, particularly in the Services businesses. The DCF valuation is $12.70 (+ 4%) and the 12-month price target is $13.71 (+ 11%). The increased valuation reflects lower net debt (on translation of USD debt) and lower capex forecasts, partly offset by the earnings revisions. Investment view „o UGL has seen a substantial re-rating in the last six months (from 8.6x FY10 EPS to 14.3x). This re-rating has been spurred by the renewal of major contracts, new wins and the overall market recovery. However, with no major contract renewals in FY10, the only major catalysts for further rerating or earnings upgrades appear to be new contract wins. With UGL trading in line with our valuation, we retain an ACCUMULATE / MARKET PERFORM call.
UGL Price at posting:
$14.27 Sentiment: Hold Disclosure: Not Held
