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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.
Edit: Ves - in your calculations, did you make any assumptions about the immediate (1-2year) future of the engineering business, especially around the cyclical nature of mining services?
However, the question I can't seem to answer is, how much comfort does a relative valuation really give?
In reviewing things the property valuation multiples seem pretty stable - the engineering service multiples are still getting squeezed and UGL has had contract blowout issues of their own so they certainly won’t be immune to that. Nervous about more possible hand grenades on the engineering side but still like the property – separation time line looks like its pushing out though.
Once an opportunity is identified, there are two risks in relation to timing, one is buying too early, the other is missing out on the price that gives rise to the opportunity.
Buying too early means I suffer a few % points of opportunity cost over my envisaged time frame but I have at least locked in acceptable actual return. (so long as my assumptions were correct).
The ramifications of ‘could have, would have, should have’ are potentially unlimited opportunity costs and missing the opportunity to lock in an acceptable actual return.
Buying too early is a mistake of commission that sucks. ‘Could have, would have, should have’ is a mistake of omission that whilst probably easier to bear, can ultimately be a lot more detrimental to wealth creation.
Obviously I would like to buy at the absolute low – but I’m not that good, given my fallibility I err on the side of buying too early rather than missing out. But I’m not oblivious to the charts or the short term momentum of the business – they guide how aggressively I accumulate. Specifically I bought NVT this time round because; the market had had a chance to factor in the 2nd half forecast; and from an EW perspective there are some possibilities that a low is in place (I genuinely hope not) – ie a fairly symmetrical ABC correction terminating at the 61.8% Fib. Now I don’t really trust that analysis but it seems as good a reason as any to fire off another shot – and I still have a few more rounds left. I may run out of ammo before the price stops falling and that is a situation that really frustrates me but as I have hopefully explained, ultimately I would rather be a premature accumulator then the guy who sees the possibility but never takes the chance due to performance anxiety.
It is the short-term engineering issues that I don't know how to accommodate (how much room for error do I allow). However, should there be no major cost blowouts, then there's very little uncertainty for me.
The 2013 financial year saw difficult trading conditions adversely impact UGL’s financial performance
following the escalation in the capital investment slowdown across the Australian resources and
infrastructure sectors and a rigorous focus on cost management by the major miners.
UGL’s financial performance in the 2013 financial year was also disappointingly impacted by
underperformance across several power projects.
The crux of the matter and what is undoubtedly driving the market at the moment.
When we last heard from UGL, the first two paragraphs were:
Since then FGE has gapped to the tune of 90% odd because of Power station contracts which I guess has helped push UGL price to within a whisker of 8+ year lows and posturing for a break of that support – perhaps massively on news.
Currently without a CEO for the engineering division because the last one had to step down due to alleged bribery whilst at Leightons.
The Macro scene is being described as a Mining Investment Cliff.
Soooo Is it time to lean harder against the herd or turn and run with them?
The Macro scene is being described as a Mining Investment Cliff.
Soooo Is it time to lean harder against the herd or turn and run with them?
@Oddson - I know you shot this question to Craft, but just to generate some discussion on the matter, here's my view:Surely it is best to wait for the demerger to happen, then purchase DTZ shares (assuming they are trading at an attractive valuation)
Hi Craft,
How do you see the demerger working out? It is planned for FY2015 and is subject to approvals (refer recent AGM presentation). I get the impression recent posters are keen to own the DTZ business but not the Engineering business. Surely it is best to wait for the demerger to happen, then purchase DTZ shares (assuming they are trading at an attractive valuation). There must be a risk that the demerger gets delayed, wrong management team gets appointed, corporate cost overruns and so on....
Cheers
I'd argue it's only partly contrary to the mainstream view... Going by recently reported earnings, if you adjust DTZ earnings for the one-off re-branding (all to DTZ), then you've got a situation where Engineering is a significantly smaller portion of overall earnings.
That being said, there's still the chance of short-term pain from Engineering - but all it has to do is have maintain flat-ish cash flow (through reduced Capex and cost reduction) over the next few years... by then DTZ will be an overwhelming portion of earnings and Engineering will be something on the size - should the macro trend in the property services space continue.
Probably worth mentioning that a reduction in debt and some cost reduction within Engineering is management's focus at the moment, so they're working toward that goal.
Soooo Is it time to lean harder against the herd or turn and run with them?
As investors we get paid for taking the risk that things turn out different to what they are currently priced for. I think UGL with DTZ tucked away inside is a risk priced attractively now. not sure how it will be priced when things become clearer.
The biggest risk to the timetable as I see it at the moment is that the engineering side of the business may need the property business strength and diversification for a bit longer then the timetable indicated.
Hi Odds - on
Hi Klogg@So_Cynical - Appreciate the feedback, but I'm only really interested in valuation techniques and how this fits in. I'm no good at picking the bottom and will leave that to those who are.
This is the way I normally work. I usually look at a form of peer analysis, but not to get a relative valuation. Rather, this feeds me some info at a macro level and what the competitive landscape is for the company.
I guess this really answers my question though. The relative valuation alone seems to be a fairly weak bit of information, but I should be using it to backup any absolute valuation.
When I did my DCF calcs, I did use a similar technique to the one you mentioned. I don't have the figures next to me, so I don't know if my calculations were near yours, but the business definitely fell into the value bucket.
Thanks again Ves and skc. You guys have answered my last few questions.
Appreciate it.
Edit: Ves - in your calculations, did you make any assumptions about the immediate (1-2year) future of the engineering business, especially around the cyclical nature of mining services?
But in companies with a fairly good competitive position it’s pretty much a waste of time because this line of thinking is most likely going to be so divergent from the underlying reality that unless the market is missing something really obvious you will never see a price low enough to match.
In my calcs, I allowed for a decline in EBIT by 10% YoY for the next 3 years. Looking back, this doesn't really reflect reality, as there will either be a major blowout/contract loss, or nothing at all. Slowly losing business seems to me like it's the least likely scenario.I pretty much agree with you that the short and medium term earnings of engineering will most likely be flat
I hear you on this one.I am also not a fan a Trevor Rowe...
Here's a bunch of broker comments on UGL...
I've always read Odd-Son. I am an idiot :bonk:
This doesn't worry me so much - Normally have to be in disagreement with the broking consensus to get a price that is justifies my long term cash flow assumptions.
All dressed up in my finest chain mesh gloves but now where to go yet - does it look like it wants to break to you?
With the comment on factoring in no growth - this relates to the terminal value / perpetuity calculation only (unless of course it's a mature / no growth business with lousy prospects).Finally, one last question. What's your reasoning behind not factoring in any growth? I do this in most cases, but given the nature/position of the DTZ business, it's extremely difficult to picture a no-growth situation.
With the comment on factoring in no growth - this relates to the terminal value / perpetuity calculation only (unless of course it's a mature / no growth business with lousy prospects).
Then there's the terminal value. This is always no growth for me - the cash flows at this point are very long-dated, and as a conservative measure (read: admission by this point it's 10+ years and it's too hard) I refuse to pay a premium for carrying the risk that the company may not be able to pump excess capital into any form of competitive advantage by this point in time. More than happy to pay for the company maintaining earnings power if I believe they will have a sustainable competitive advantage of degree by the end of my cash flow period (see my comment above in relation to the confidence factor that reduces the terminal value calculation).
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