UGL disappoints on earnings but points to the future

UGL has confirmed its plans to split the company. But the planned demerger is some way off.

It’s always advisable to put your best foot forward when delivering a shocker of an earnings result as UGL’s Richard Leupen did this morning.

Put aside the minor technicality of a 73% drop in reportable earnings, on an underlying basis it wasn’t too bad at all with only a 45% drop. And that, as Leupen pointed out, was in line with guidance. 

Well yes, that is true. But it was at the lower end of the guidance range, just as the forward guidance now has a range that makes most analyst forecasts of $127 million in underlying earnings look a little top-heavy, a development that is certain to attract selling pressure to the stock this morning.

The big diversion, however, was confirmation the company will proceed with the corporate strategy du jour, the demerger of its engineering and property divisions.

There is no doubt shareholders invariably do much better from demergers than the madness normally associated with mergers and acquisitions, but UGL has set a long time line on its proposed split, scheduled for some time next financial year.

Of more immediate concern to shareholders will be the cut to the dividend. The final dividend at just 5c, and unfranked at that, brings the full year payout to 39c, way below the expected 47c many brokers had anticipated.

Given the earnings decline, and the challenges facing the company in the post construction phase of the resources boom, conserving capital may be the responsible course to take. But in a market obsessed with yield, it is unlikely to provide any support for UGL’s flagging share price.

The massive profit decline was struck on a relatively modest 14% decline in revenue, weighed down costs associated with the restructure and rebranding of its DTZ global property business.

Smacked about by the sudden change in fortunes for mining services (see Roger Montgomery's Inside the mining services disaster), Leupen suddenly has found himself at the helm of an outfit that requires major rehabiliation after years of being celebrated as being the engineer of a company on a rapid growth trajectory. His strategy is correct. But investors can be unforgiving when the going gets tough.