UGL finds resources too risky
THE global contractor UGL is dramatically shifting its focus away from resources after its first-half net profit slumped 53 per cent.
The chief executive, Richard Leupen, has long been wary of hitching UGL's wagon to the whims of the volatile resources cycle, preferring the more modest but steadier profit margins offered by long-term maintenance, outsourcing and property management contracts.
But speaking to analysts after presenting the company's results, Mr Leupen said UGL was accelerating the strategic shift and described it as the "biggest change" in his 13 years at the helm.
"This now is a structural repositioning of markets, I think," he said.
"Since last time [six months ago] we've stood here and said we're worried about the resources sector, we really have been flat out in restructuring the company to deal with it."
UGL is spending $40 million on the restructure, which includes a reduction of 700 staff in its resources division.
Mr Leupen did not expect resources markets to "nosedive", but said the cycle was inevitably falling from its peak. And after a decade of building an engineering contracting company to service the boom, it was necessary to continue to diversify.
"We'd rather have a slower growth rate than have a $500 million write-off," he said.
Mr Leupen has been particularly bullish about what he describes as a "megatrend" towards the global outsourcing of property maintenance and management services.
UGL made a net profit of $26 million in the six months to December 31, down from $55.4 million in the previous corresponding period.
Earnings in its engineering business fell 45 per cent to $47.1 million owing to cost overruns on large projects including the Pluto LNG venture in Western Australia.
Operations and maintenance earnings fell 34 per cent to $12.5 million because of projects being scaled back or cancelled.
But the declines were partially offset by UGL's property division, which reported a 33 per cent increase in earnings to $45.8 million, riding the wave of recovery in the US property market and strong growth in Asia.
UGL warned soft commodity prices would continue to cause deferrals of major resources and infrastructure projects for the rest of the year.
"We're hearing almost all the major corporates talking about being more cautious about their capital development programmes," Mr Leupen said. "These aren't project delays any more, it's a complete repositioning of the project cycle."
UGL provided full-year guidance for underlying net profit of between $150 million and $160 million, falling short of analysts' expectations.
The shares fell 60¢, or 5.5 per cent, to $10.30.
UGL declared a 50 per cent franked interim dividend of 34¢, payable on March 27.