Stepping away from UGL and WBB

We cease coverage of the two companies to look for better opportunities elsewhere.

Wide Bay Australia (WBB)

Wide Bay is the largest financial services company north of Brisbane with 37 outlets in Queensland and broker loan centres in Brisbane, Melbourne and Sydney.

Following a change in management in February 2013, the company has focused on investing in its systems and technology to create efficiency gains. Offsetting this has been weak operational conditions, especially in North Queensland. Also, fierce competition from larger lenders has made it difficult to benefit from the increased credit growth in the first half.

As part of the restructure led by managing director Martin Barrett, the company will change its name to Auswide Bank and convert to bank status. This is due to occur in April this year.   

The two main investments in IT have been a new loan processing system and a core banking system, both with a cost of around $1.5 million.

First half profit was a bit lower than expectations at $6.5m, and down from $7.19m last year. Loan book growth didn’t meet expectations at an annualised 4.3 per cent, versus system growth of 7.2 per cent. Loan approvals were very strong, up 33 per cent to $234m.

The company is looking to grow its loan book across all of mortgages, business banking and personal loans but retaining its heavy weighting towards mortgages. The increased broker channels as well as investment in systems should help home lending growth.

South East Queensland has held up much better than far North Queensland. Management has done a good job to transition its exposure and have 60 per cent of volume from South East Queensland and interstate.

The asset quality has continued its positive trend from the last 18 months with the 30 day arrears loans reducing from $43m (1.93 per cent of book) at FY14 to $25.9m (1.1 per cent of book) at 1H15. But bad and doubtful debts did increase from $180,000 to $424,000.

The cost to income ratio got worse in the first half at 68 per cent vs 66.3 per cent last year. Managements target is to eventually reduce this to 60 per cent.

The group capital adequacy ratio remains strong at 14.9 per cent versus a previously announced target of 13 per cent.

The efforts to promote growth and improve efficiencies should have a positive impact over the next couple of years. However, this will be partly offset by operational weakness in Queensland and particularly in the mining towns. We have a $5.90 valuation and are ceasing coverage due to the lack of a catalyst to re-rate the stock higher.

UGL

The interim result reinforced why we have had a “sell” recommendation on UGL (see UGL’s tainted outlook, December 1, 2014). If you did want exposure to the challenged mining services sector you certainly wouldn’t look at a company with contract issues.

The result included a larger than expected $175m impairment in the Ichthys power contract, as well as $80m of other write downs.

The problem is, given Ichthys is only in the early stages there is likely to be further bad news and write-downs from the contract over the next 12 months.

In the result conference call it was suggested that a further review was due to be undertaken across the business. Given a new chief financial officer has just started, further bad news is likely.

The company has also come under question for not disclosing the contract issues for many months after its joint venture partner did. The timing of the DTZ sale is also questionable, and the large capital return now means the company may have balance sheet issues as the extent of the contract issues is revealed.

The other problem is that the uncertainty over profitability and the status of key contracts means the company is unlikely to be a takeover target no matter how cheap it gets.

Although it’s easy enough to forecast revenue, there really isn’t enough information to forecast profit or value the company. Given the situation, very high risk, and lack of visibility around contract issues, we are ceasing coverage of UGL.