UGL - UGL Limited

[Ves]

VES, when you talk about no growth and then talk about maintaining earnings power..I presume that you are referring to a business being able to maintain margins and increase revenue in-line with, but not above, inflation?
That is what I do in the large majority of the valuations I do..

I've been playing around with a few options in the last few months.

Basically I take the FCFF (or whichever you use) from the last period of your cash flow analysis and divide it by some sort of risk-adjusted cost of capital for the firm (usually between 11% and 15%).

So say at year 10 you had cash flow of $1 a share and I thought the cost of capital should be 12% for UGL. TV at year 10 would be $8.33. Discounted back to year 0 at 15% (my required rate of return before tax) this'd be $2.06. as I said I would personally adjust this based on my confidence in the enduring competitive advantage of the business. So for instance.... $2.06 x 50% = $1.03. It's pretty arbitrary as all valuation is, but it makes you think about the competitive advantage and how far above the replacement cost of assets you are willing to pay for it in today's dollars.

Here's a comparison of the same for 5 different scenarios using $1 as the base earnings at year 10. Discount rate from year 10 to year 0 is always 15% in all scenarios.

Scenario A B C D E
TV Disc 11% 12% 13% 14% 15%
TV $9.09 $8.33 $7.69 $7.14 $6.67
Year 0 $2.25 $2.06 $1.90 $1.77 $1.65

Scenario A is 36% higher than scenario E. B is 25%, C 15% and D 7%.... which demonstrates that discount rates impact the result pretty quickly.

 

[odds-on]

Not saying they are right, just saying their attitude will take time to change and I am willing to bet that they won't change fast enough to make the property business too dear overnight.



On the chart alone it sure looks like it wants to break down. They only held AGM on 29 Oct so you'd think that they will wait another few weeks before releasing any earth shattering left field news (if they exist). But if things get ugly then a cap raising will definitely be on.

Apart from potential nasties from the engineering side, the other issue with jumping in now would be the uncertainty around capital structure of the two businesses. DTZ may have good prospects but if they load it up with too much debt (to ease the burden of the engineering side) then it may not be that awesome either.

The fact that they said the demerger will take over a year... you have to ask why so long? None of the reasonable guesses are good imo.

If I was really keen on this I'd make sure I have a parcel to secure the chance to participate in any cap raising. But when to buy the rest would be quite an art...

Great post, skc.

Craft, Klogg, this is what I would be worrying about if I was to take a position in UGL at the current price - there is a list of "known unknowns" to add to the usual DTZ/UGL business risk analysis. Some facts and a timeline would help. I do not have any experience of de-mergers to use as a reference, but I would not be surprised if it turns into a debacle (perhaps I am slightly biased by recent corporate announcements/governance in contracting-type businesses).

Cheers

 

[Ves]

I'm not planning on selling post-demerger (unless there's a business reason), so the multiple re-pricing, if any, can take all the time in the world for all I care. That's the beauty of not being a forced / planned seller, you harvest the cash flow not the market's assessment of the business.

 

[odds-on]

http://m.theaustralian.com.au/busin...-urge-to-demerge/story-e6frg916-1226619468369

Interesting reading...

 

[tech/a]

I'm not planning on selling post-demerger (unless there's a business reason), so the multiple re-pricing, if any, can take all the time in the world for all I care. That's the beauty of not being a forced / planned seller, you harvest the cash flow not the market's assessment of the business.

At what price did you buy this stock?

 

[craft]

Not saying they are right, just saying their attitude will take time to change and I am willing to bet that they won't change fast enough to make the property business too dear overnight.

Yep speedy changes of mind is not the norm - price targets following the market price however is.

Apart from potential nasties from the engineering side, the other issue with jumping in now would be the uncertainty around capital structure of the two businesses. DTZ may have good prospects but if they load it up with too much debt (to ease the burden of the engineering side) then it may not be that awesome either.

I would welcome a capital raising to get the structures in order with the proviso its a proportional rights issue. A placement and SPP would probably change my mind on the whole investment.

 

[skc]

I would welcome a capital raising to get the structures in order with the proviso its a proportional rights issue. A placement and SPP would probably change my mind on the whole investment.

Hopefully proportional rights issue with additional take up.

May be one way to play this is to short the engineering sector (say some selection DOW/BKN/MND/LEI/WOR) along with a long in UGL as a partial hedge. Won't be perfect and won't really hedge against a major blowup event.

I better spend more time studying the property segment given how willing you seem to accept the risk on the other dog.

 

[tech/a]

Hopefully proportional rights issue with additional take up.

May be one way to play this is to short the engineering sector (say some selection DOW/BKN/MND/LEI/WOR) along with a long in UGL as a partial hedge. Won't be perfect and won't really hedge against a major blowup event.

I better spend more time studying the property segment given how willing you seem to accept the risk on the other dog.

How do you weight a trade like that?

 

[craft]

risk on the other dog.

The price on even this risk in isolation is starting to look O.K t me.

Engineering is a market leader in Australia and New Zealand providing engineering, construction and
maintenance services with revenue in excess of $2.3 billion. The business has a broad end-market
exposure across multiple sectors which provide essential services including power, water,
transportation, resources and defence.

UGL currently has 8,000 people operating in 6 countries. We are expanding our presence in Asia and
now operate in Hong Kong, India, Malaysia and Singapore.

The hallmark of the UGL business model remains its strong recurring revenue base. Approximately
77 per cent of Engineering’s $4.8 billion order book comprises long term recurring maintenance style
contracts. Combined with a rigorous risk management framework, the volatility of UGL’s earnings
base continues to be significantly lower than its industry peers.

Also a decent proportion of the engineering business is exposed to passenger rail which marches to a somewhat different Macro beat. (not to mention the diversification from property)

The company is big enough to be able to obtain debt funding outside the banks as evidenced by their US notes issue.

Contract Blow-ups for UGL are profit issues not business viability issues. Contractors financial ability to deliver is critical in awarding contracts - a lot of the smaller competitors already have a large cloud over their head for future contracts.

 

[craft]

Whilst I'm cutting and pasting - here's a bit on DTZ.

While this slide provides a snapshot of DTZ today, the company has a proud history of advising
clients for nearly 230 years with its beginnings in the UK in 1784.

Today, DTZ is a leading integrated global property services company which is becoming one of the
top 3 global property services companies. Revenue continues to grow solidly and in the 2014
financial year revenue is expected to be in excess of $2.0 billion.

DTZ’s capabilities are truly global with more than 45,000 people operating in 52 countries. The
business’ transactional revenue base is balanced by a significant recurring earnings base currently
split approximately 30 per cent corporate real estate services and 70 per cent facilities management
services.

DTZ has a diversified client base servicing blue chip companies, governments, public institutions and
private enterprise across a broad range of end markets. Clients are welcoming our unique platform
and in the 2013 Watkins global property services survey, DTZ was ranked #1 by clients among global
service providers.

Even if your not into a valuation style of investing a simple comparison with its international peers on metrics as simple as price /Revenue or price/EBITDA should tell you something.

UGL's total EV at the moment is approx. 1.65 Billon.

 

[craft]

Can I get anyone's thoughts on why Capex spend was so high last FY?

2013:
Eng + Ops/Maint ~52m
DTZ = ~48.5m

2012:
Eng + Ops/Maint ~45m
DTZ ~ 24m

I can understand the increase within Property Services, but why such a high capex spend within a business that is suffering cost blowouts? Is it due to the style of business they're winning within Engineering?

Unfortunately I can't provide my own opinion on this, but I can't find much within any recent announcements about it. Hoping someone has come across this in some form or another...

Klogg

A lot of that capex figure has been capitalised which would indicate its growth capex. I have seen mention of Software costs for DTZ that explains the 'software under development' being capitalised in intangibles but nothing to explain the 'development costs' or 'project establishment costs' which are being capitalised. Without an explanation its hard to know if this is legit spending for future income growth or creative accounting (Hmmm flag). Deciphering between maintenance capex and growth capex is a bit of an art. Looking at depreciation costs and historical capex to revnue ratios gives some insight.

 

[Ves]

Klogg

A lot of that capex figure has been capitalised which would indicate its growth capex. I have seen mention of Software costs for DTZ that explains the 'software under development' being capitalised in intangibles but nothing to explain the 'development costs' or 'project establishment costs' which are being capitalised. Without an explanation its hard to know if this is legit spending for future income growth or creative accounting (Hmmm flag). Deciphering between maintenance capex and growth capex is a bit of an art. Looking at depreciation costs and historical capex to revnue ratios gives some insight.

DTZ upgraded their software platform - it is described in the 2013 results preso as "completion of the roll-out of market leading global IT platform."

 

[craft]

On the chart alone it sure looks like it wants to break down.

Looks like its starting to give it a shake. Hopefully it will get on with it because despite all the good advice I'm adding some more (sticking to my plan) but don't have much time left before heading off travelling.


On returning - UGL is probably the first stock price I will look at to see how much of a spanking it has handed too me - (I think that means something about my confidence in it for the short term).

Catch you all next year.

 

[skc]

Looks like its starting to give it a shake. Hopefully it will get on with it because despite all the good advice I'm adding some more (sticking to my plan) but don't have much time left before heading off travelling.

On returning - UGL is probably the first stock price I will look at to see how much of a spanking it has handed too me - (I think that means something about my confidence in it for the short term).

Catch you all next year.

I have a small short on UGL at the moment but probably won't hold it more than a few days.

Have a great trip.

 

[craft]

I have a small short on UGL at the moment

Great - now I'm going to go into cyber isolation and have nightmares that skc was on the other side

 

[McLovin]

Any reason for the 9% rise today or someone just spreading Christmas cheer?

 

[Klogg]

Any reason for the 9% rise today or someone just spreading Christmas cheer?

None that I can see... It just seems that MND and UGL had a dream run for no apparent reason.
Short covering before holidays? (stealing SKCs idea from another thread)

 

[skc]

None that I can see... It just seems that MND and UGL had a dream run for no apparent reason.
Short covering before holidays? (stealing SKCs idea from another thread)

Any reason for the 9% rise today or someone just spreading Christmas cheer?

Still scratching my head on this one. The buying was very consistent through the day. Names that went 7%+ included UGL, WOR, MND, BLY, BKN.

My guess is some fund doing a bit of short covering before going on holiday. There were some buying in the well shorted retail names as well.

 

[pixel]

Still scratching my head on this one. The buying was very consistent through the day. Names that went 7%+ included UGL, WOR, MND, BLY, BKN.

My guess is some fund doing a bit of short covering before going on holiday. There were some buying in the well shorted retail names as well.

It could be the lead to a recovery of mining and mining support stocks.
If we assume that the recent sell-off around the Globe has been overdone - Europe is currently up in the order of 1% - then it stands to reason that our market should follow. I bought ASL and WOR, and added UGL and DCG to my watchlists.

About UGL: It showed up on my scans today -



The weekly chart suggests some more work needs to be done, but the potential exists for a double bottom to develop:

 

[pixel]

Quite by accident, I hit the "M" button today and got the Monthly chart. That's when I found that the current Low matched the Low back in 2008. Some investors have looooong memories, and it's therefore possible that sellers have dried up because of this echo from the past.

Sure, the weekly chart has UGL still in an UGLy downtrend.



... but the Daily suggests a rebound after pullback.



I don't hold just yet, but have added it to my watchlist.