UGL - UGL Limited

[robusta]

For what it is worth here are some broker views on UGL from Fnarena

http://finance.ninemsn.com.au/newscolumnists/other/8659873/its-getting-a-bit-ugly-for-ugl

 

[VSntchr]

For those of you who delve a little deeper into the valuation side of things - have you considered the impact that operating leases have on the valuation of UGL?

The expenses as of 2012 became quite substantial.
For 2012 the reported expense was $70m.
and then from the annual report:

Note 27: OPERATING LEASES
Non‑cancellable operating leases are payable as follows:
– not later than one year $ 81,316
– later than one year but not later than five years $ 160,037
– later than five years $ 120,415

Reclassifying these expenses (as we should) means that debt jumps by about $300m. To compensate pre-tax earnings are lifted by about $36m..

All-in-all the overall affect is negative on my valuation by a substantial amount...HOWEVER still leaves me thinking that this stock is now very cheap

 

[Ves]

Reclassifying these expenses (as we should) means that debt jumps by about $300m.

Can you explain why you would do this?

 

[VSntchr]

Can you explain why you would do this?

Accounting says that we should treat operating leases as 'operating expenses'. But wouldn't it be more realistic to classify them as 'financing expenses'?

My argument is that the benefits from the assets are usually going to be incurred over more than just the current period..

 

[Ves]

When I value a stock I'm trying to figure out a) how much free cash flow it generates and b) how much of this free cash flow can be retained and what return can the company re-invest this at and finally c) how much will be distributed.

Therefore, the cost of premises, in this case a lease obligation, is a cash expense that needs to be taken off before we can arrive at a free cash flow figure.

Whatever the additional benefits of the lease to the business will show up in the FCF somewhere in future years.

I only count the lease obligations for ratios that have to do with leverage and debt / financing coverage and all that sort of jazz.

 

[VSntchr]

Fair enough.

I do it this way as I was taught that it provides a clearer measure of operating earnings - which is my first step in getting to FCFF..to each his own though..

Back to the valuations for me - plenty of work to do tonight, I'm loving all the market activity at the moment!

 

[craft]

For what it is worth here are some broker views on UGL from Fnarena

http://finance.ninemsn.com.au/newscolumnists/other/8659873/its-getting-a-bit-ugly-for-ugl

UGL Ltd , an engineering, mining operations and property maintenance conglomerate, has run into a perfect storm

Mmmmmm I've always loved a perfect storm.

Over the past decade, UGL has grown from being a Western
Australia-based resources construction business to become
a diverse, multinational outsourced services company.

http://www.ugllimited.com/templates/pdf/UGLAnnualReport2012.pdf

Big picture - has any other Aus resource service company used the mining boom to diversify and broaden their business for an inevitable end to the boom more then UGL have? Yes UGL has issues at the moment but they are far better placed then most to deal with the decline in mining investment. Let the creative destruction begin. I know who I'm interested in.

 

[Ferret]

Re: UGL - United Group

Hi Ferret,

What did you think of today's guidance? Pretty poor result from the company one would think?

I always thought they would be prone to more weakness following the mid year - all seems evident now! The director purchases a while back seemed very token also.

As an aside - this result seemed to hit a lot of engineering and mining services today...

Hi JTLP,

Pretty disappointing. A second downgrade relatively soon after the midyear is the sort of thing that makes me lose confidence in a company's management.

However, although the market is never wrong, I sense that the reaction might be overdone. I'm not going to sell out, but I wouldn't consider buying any more until there is a pickup in sentiment for the whole mining services sector. I'm starting to feel the whole sector is oversold.

 

[So_Cynical]

I figure someone should bang up a chart, have a bit of a look back...the last substantial low was the GFC low of Nov 2008, looks like around $6.70

• Aug 2008 shares on issue 164M so MC in Nov of around 1.1B

Current SP $7.60

• May 2013 shares on issue 166.5M and MC of around 1.25B

Looks like UGL haven't done a cap raising in the last 6 years..solid dividend history, and the SP did a fast recovery to over $15 by Sept 09...however buy and hold after Oct/Sept 09 would not of worked out to well.
~

 

[skc]

Big picture - has any other Aus resource service company used the mining boom to diversify and broaden their business for an inevitable end to the boom more then UGL have? Yes UGL has issues at the moment but they are far better placed then most to deal with the decline in mining investment. Let the creative destruction begin. I know who I'm interested in.

Fair point. But doesn't that simply position them as the least bad?

On their HY figures, property services was ~44% of group EBIT (before corporate costs). If you apply this same ratio to underlying NPAT of $51m, you get $22.5m NPAT. So full year ~$46-47m. UGL guidance is for ~$95m underlying NPAT. So since property services had $46m that leaves ~$49m to engineering.

So let's say property services demerges and gets a PE 15x. That's 15 x $46m = $700m say.
The engineering parts will probably trade at 8x. That's 8 x $49m = $390m.

Total $1090m market cap, compared to market cap today ~$1250m.

Doesn't jump out at me as oversold unless property services has much higher growth and/or attracts much higher valuation.

 

[craft]

Fair point. But doesn't that simply position them as the least bad?

On their HY figures, property services was ~44% of group EBIT (before corporate costs). If you apply this same ratio to underlying NPAT of $51m, you get $22.5m NPAT. So full year ~$46-47m. UGL guidance is for ~$95m underlying NPAT. So since property services had $46m that leaves ~$49m to engineering.

So let's say property services demerges and gets a PE 15x. That's 15 x $46m = $700m say.
The engineering parts will probably trade at 8x. That's 8 x $49m = $390m.

Total $1090m market cap, compared to market cap today ~$1250m.

Doesn't jump out at me as oversold unless property services has much higher growth and/or attracts much higher valuation.

Looking at international peers JLL & CBRE and discounting their valuations because DTZ isn’t quite at that scale yet I think property is worth at least 1 Billion in round numbers.

Today’s EV is 1.7 Billion.

Is the rest worth .7 Billion?

The average ROA right back to 1994 is around 8%. Assets ex property is about 1.2 B. Average year profit for the rest should be close to 100M. Get really pessimistic and knock that back by 30% and factor in no valuable growth and that still gives you a 10% yield.

This year’s 95M is not an average year – contract overruns and restructuring have hammered the result, it is not however a permanent shift in profitability in my view.

Cheap enough for me to start accumulating with a long term view. And I can’t say that about much at the moment.

Hope your shorter term perspective prevails though and it continues to get hammered.

 

[VSntchr]

Hope your shorter term perspective prevails though and it continues to get hammered.

Quoted from 1987 Buffet Letter to Shareholders:

Mr. Market has incurable emotional problems. At times he feels euphoric and can see only the favourable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mining and associated services is experiencing a contraction, but surely for companies that are either carrying lots of cash, have a dominating market position, have a diversified revenue base or a combination of such factors – this can be seen as a positive in the long run. It is times like this that flush the weaker companies, leaving the stronger ones to mop up the leftovers and eventually strengthen their position.

It’s easy to get caught up thinking that this is the end for mining – but taking a medium-longer term view, the demand for products isn’t really diminishing to 0 is it. Stronger times will lie ahead, it’s just a matter of determining who’s going to be around to benefit – and what’s a fair price to pay for these companies.

UGL is not the only one I have in mind, there are a few other companies that have some of the above mentioned factors – however they aren’t cheap enough to get excited yet!

 

[craft]

It’s easy to get caught up thinking that this is the end for mining – but taking a medium-longer term view, the demand for products isn’t really diminishing to 0 is it. Stronger times will lie ahead, it’s just a matter of determining who’s going to be around to benefit – and what’s a fair price to pay for these companies.

UGL is not the only one I have in mind, there are a few other companies that have some of the above mentioned factors – however they aren’t cheap enough to get excited yet!

Just to clarify my thoughts on UGL– My primary interest is not positioning yet for the type of mining services bottoming you describe here.

My interest predominantly lies in the international property business.

 

[VSntchr]

Just to clarify my thoughts on UGL– My primary interest is not positioning yet for the type of mining services bottoming you describe here.

My interest predominantly lies in the international property business.

As does mine.

 

[odds-on]

http://www.smh.com.au/business/earn...-slumps-ahead-of-demerger-20130812-2rqyx.html

Demerger planned for 2015. A lot can happen between now and then. Any thoughts?

 

[Klogg]

Looking at international peers JLL & CBRE and discounting their valuations because DTZ isn’t quite at that scale yet I think property is worth at least 1 Billion in round numbers.

I realise I'm bringing up an old post here, but I'm very curious....

@Craft - I followed your line of thinking and come up with roughly the same figures (mostly through peer comparison). However, the question I can't seem to answer is, how much comfort does a relative valuation really give?

Don't get me wrong, I've looked at the company many other ways - but I've only rarely used a relative valuation technique, and have only used it on companies that were much simpler/smaller... so I'm wondering how much weight to give this aspect of a valuation.

Thanks in advance.

(For what it's worth, this was done purely for educational purposes)

 

[skc]

I realise I'm bringing up an old post here, but I'm very curious....

@Craft - I followed your line of thinking and come up with roughly the same figures (mostly through peer comparison). However, the question I can't seem to answer is, how much comfort does a relative valuation really give?

Don't get me wrong, I've looked at the company many other ways - but I've only rarely used a relative valuation technique, and have only used it on companies that were much simpler/smaller... so I'm wondering how much weight to give this aspect of a valuation.

Thanks in advance.

(For what it's worth, this was done purely for educational purposes)

Be careful with earning multiples across different markets as well. The difference can stay that way for a long time. Here's some peer PE on ALL by UBS (completely industry but just to illustrate the point).



It'd be hard to come up with a valuation using a PE multiple range between 13 - 28.

 

[Klogg]

Be careful with earning multiples across different markets as well. The difference can stay that way for a long time. Here's some peer PE on ALL by UBS (completely industry but just to illustrate the point).

View attachment 55603

It'd be hard to come up with a valuation using a PE multiple range between 13 - 28.

The gaming industry is very different and less dependent on the macro trend - but I take your point.
Thanks

 

[So_Cynical]

Keeping things simple, if we consider that there is a time to buy, a time to hold and a time to sell...what time is it now???

If i had some funds id be all over this....and that would probably be a premature entry.

 

[Ves]

Klogg, FWIW, I don't really value this using "Relative multiples" (Ie. EV/EBIT, P/E) but mainly on my own assumptions as to the future economics of the business wrapped into a DCF valuation.

And really, this is only long term thinking, and you can think of it what you will.... that group EBIT will roughly double over the period to 2025. I'm valuing the engineering business and the property services businesses separately and then subtracting corporate corporate level costs. Probably need to do that to be ball park.

I already have a pretty large portfolio allocation to UGL at a price a fair bit higher than the current market price.... but I have left myself room in my portfolio rules to add to this when I feel that the market price is really attractive. Starting to get closer to that.