UGL - UGL Limited

[ROE]

Australian paper has an article from its former CEO of dtz division accusing UGL is cooking the book
Hmmm
http://www.theaustralian.com.au/bus...books/story-fn91v9q3-1226828782946#mm-premium

 

[craft]

Australian paper has an article from its former CEO of dtz division accusing UGL is cooking the book
Hmmm
http://www.theaustralian.com.au/bus...books/story-fn91v9q3-1226828782946#mm-premium

The investment case for this one still has merit I think, But I have lost conviction so am scaling my position right back. The allegations, the staff/director changes, the latest report makes me think watching from the outside may be more prudent.

Management have acknowledged third party interest in DTZ - If they go that course I might miss a quick profit by getting out - but the possibility that I don't get good allocation to DTZ also invalidates my long term reason for staying.

 

[Klogg]

The investment case for this one still has merit I think, But I have lost conviction so am scaling my position right back. The allegations, the staff/director changes, the latest report makes me think watching from the outside may be more prudent.

Management have acknowledged third party interest in DTZ - If they go that course I might miss a quick profit by getting out - but the possibility that I don't get good allocation to DTZ also invalidates my long term reason for staying.

The investment case has more merit now than before based on third party interests, as there is potential to sell DTZ and return this money to shareholders - provided they sell it at something close to your valuation.
However, you could argue you'd rather own the business than receive 'fair value' for it now.


That said, I sold out of the small position I had in UGL based on the accusation of fraud alone. If this were even partially true, any 3rd party interest, along with my valuation of DTZ would be threatened.

Funnily enough this started as a learning exercise on valuation based on DCF, but I'll soon also learn whether or not I reacted correctly to the 'cooking the books' accusation. Erred on the side of caution in this case, simply because I don't know any better...

 

[craft]

The investment case has more merit now than before based on third party interests, as there is potential to sell DTZ and return this money to shareholders - provided they sell it at something close to your valuation.
However, you could argue you'd rather own the business than receive 'fair value' for it now.

I would argue that strongly. Closing of the discount is just a one off – the market will close the valuation gap anyway over time if the company does well. The importance of the discount being unwound pails into insignificance to the return that can be generated from a good business.

The discount gives you a better return against what the business will eventually do and it gives you some downside protection – but the unwinding of the discount is not a big deal to me – if it comes about by a change of control transaction and means lose of exposure to a good long term business, that can be quite detrimental to long term success even if it comes with a nice short term sugar hit profit.

That said, I sold out of the small position I had in UGL based on the accusation of fraud alone. If this were even partially true, any 3rd party interest, along with my valuation of DTZ would be threatened.

Funnily enough this started as a learning exercise on valuation based on DCF, but I'll soon also learn whether or not I reacted correctly to the 'cooking the books' accusation. Erred on the side of caution in this case, simply because I don't know any better...

I probably wouldn’t normally put much weight on former employee allegations though in this case I am a bit unnerved by the timing proximity to Robert Denham’s departure – I had been pondering his leaving since it was announced.

"We will be vigorously defending these, and believe they will be most likely thrown out at summary judgment stage, given there is no evidence around Mr Shibuya's allegations. Given UGL values its integrity and reputation very highly, it is actively examining potential counter-claims against Mr Shibuya and we intend to pursue these vigorously," it said.

from Australian article.

Counter claim to protect its integrity and reputation? – Me thinks they protest too much – somebody who actually has integrity and Reputation vary rarely needs lawyers to prove it.

 

[Ves]

I would argue that strongly. Closing of the discount is just a one off – the market will close the valuation gap anyway over time if the company does well. The importance of the discount being unwound pails into insignificance to the return that can be generated from a good business.

Even worse - the door gets slammed in your face and you're presented with a valuation gap that is never filled because management let go of it at a less than ideal price to the private equity sharks circling in the name of "doing a deal."

That's my biggest fear after reading the rumours in the last few weeks, and probably something I should have considered in the first place. You live and learn - not budging, but willing to admit it hasn't worked out like I thought, there's more balls in the air than first seemed, and the jugglers are looking twitchy.

My opinion on DTZ is unchanged, but not being able to take advantage of its future returns compounded would be very, very disappointing.

 

[skc]

I would argue that strongly. Closing of the discount is just a one off – the market will close the valuation gap anyway over time if the company does well. The importance of the discount being unwound pails into insignificance to the return that can be generated from a good business.

The discount gives you a better return against what the business will eventually do and it gives you some downside protection – but the unwinding of the discount is not a big deal to me – if it comes about by a change of control transaction and means lose of exposure to a good long term business, that can be quite detrimental to long term success even if it comes with a nice short term sugar hit profit.

I think there's also the issue of management incentives as well. I think it's entirely possible that they'd sell DTZ with the aim of propping up engineering. So not only you don't get to hold a good business over the long term, you don't even get the one-off dscount-closing value in your hands (UGL does, not shareholders).

I probably wouldn’t normally put much weight on former employee allegations though in this case I am a bit unnerved by the timing proximity to Robert Denham’s departure – I had been pondering his leaving since it was announced.

Yes the timing definitely was suspicious. Also remember... filing a lawsuit against former employer is a huge risk to anyone as it can amount to career suicide, especially for a senior executive. So not something you'd do for fun and there'd be some grains of truth in the allegations you'd think. Having said that... there's a lot of grey between cooking the book and massaging the financials. Every management will do something along those lines before putting the business up for sale.

 

[craft]

You live and learn - not budging, but willing to admit it hasn't worked out like I thought.

 

[Ves]

It means I'm not selling.

 

[craft]

It means I'm not selling.

I figured that - it just seemed contradictory to the rest of the line, trying to get you to flesh out that contradiction. Why you still hold your conviction despite saying that it hasn't worked out as you expected.

I certainly still see an investment case for UGL, but it is a failed investment for me because I have lost conviction in the investment case.

Do you still have conviction or are you being stubborn? (maybe there's no difference?)
Ves you know Its only because I respect you that I ask such a blunt question.

 

[McLovin]

Sold out this morning. I've been umming and ahhing over what to do with UGL and these allegations were the "excuse" I was looking for to get out. The engineering business holds very little interest for me, and it seems increasingly likely they will go down the trade sale/private equity route for the jewel.

this case I am a bit unnerved by the timing proximity to Robert Denham’s departure – I had been pondering his leaving since it was announced.

That makes two. He has an excellent record in business, and given his departure and now today's news you can't help but think there's something in the allegations.

 

[ROE]

I was waiting for cheaper price for a trade but now this so I stay out all together ...
When there is smoke there got to be a little fire some where...

 

[odds-on]

I was waiting for cheaper price for a trade but now this so I stay out all together ...
When there is smoke there got to be a little fire some where...

"There's never just one cockroach in the kitchen"

Agree this is the time to wait. This should be good entertainment, I was worried I would get bored after FGE. Hopefully we will see some strong downward pressure on the price. Might be a nice short term trade in it.

 

[Ves]

I figured that - it just seemed contradictory to the rest of the line, trying to get you to flesh out that contradiction. Why you still hold your conviction despite saying that it hasn't worked out as you expected.

What I meant by "it hasn't worked out as I expected" is that there are a lot of variables / dynamics / management issues etc. that I hadn't considered in enough depth in the first place or have come out of left field since. I'll also elaborate by saying that it turns out that it is a much harder investment to keep track to which I am usually accustomed to favouring.... this wasn't expected either, it feels at times as if it constantly needs to be monitored which isn't ideal psychologically as it's easier to suffer from information overload / constant second guessing. There are many more variables that affect their profitability and the future outcomes of the investment than I initially anticipated. That's something I will definitely learn from having seen it evolve in real time.

What I'm not saying is that I believe my investment thesis (DTZ mostly) is broken.

However, certain events have come to the fore that may exclude me from participating in that investment thesis as a long-term hold. (ie. the chance that there is a major reduction in my investment time horizon because of a forced selling of my holding and possibly at a disagreeable price).

Do you still have conviction or are you being stubborn? (maybe there's no difference?)
Ves you know Its only because I respect you that I ask such a blunt question.

Appreciate it now that I understand what you were trying to ask. I've answered that question as best as I can above. To some maybe there is no difference, it's open to interpretation more than anything.

All I can say is this: do I feel as comfortable or more comfortable holding than I did 12 months ago? No - but I don't think my conviction (or pain threshold) has deteriorated enough to make the sell call.

 

[ROE]

"There's never just one cockroach in the kitchen"

Agree this is the time to wait. This should be good entertainment, I was worried I would get bored after FGE. Hopefully we will see some strong downward pressure on the price. Might be a nice short term trade in it.

There are crooks every where but Japanese culture emphasis a lot on honour and this dude is a Japanese so that food for thought for me enough to think twice.

 

[craft]

and it seems increasingly likely they will go down the trade sale/private equity route for the jewel.

I'm wondering if/suspecting ASX listing rule 11.2 will mean any trade sale will have to go to shareholders for a vote.

USB is a substantial shareholder and has been making noises that their number for DTZ is 1.5Billion. Allen Gray and Janus Capital are both there with nearly 10% each and are certainly no fools in this type of investing. So shareholders probably have a big enough block to control management.

Notice Blackrock is also on the register with ~ 7% so you would think they are one of the Private equity bidders.

Lost my investment conviction but after sitting on the outside for a bit to clear the head I went back in on a trading basis - It just didn't want to go on with new lows.

 

[odds-on]

I'm wondering if/suspecting ASX listing rule 11.2 will mean any trade sale will have to go to shareholders for a vote.

USB is a substantial shareholder and has been making noises that their number for DTZ is 1.5Billion. Allen Gray and Janus Capital are both there with nearly 10% each and are certainly no fools in this type of investing. So shareholders probably have a big enough block to control management.

Notice Blackrock is also on the register with ~ 7% so you would think they are one of the Private equity bidders.

Lost my investment conviction but after sitting on the outside for a bit to clear the head I went back in on a trading basis - It just didn't want to go on with new lows.

Hi Craft,

http://www.smh.com.au/business/ugl-boss-denies-blowing-the-place-up-20140217-32wd2.html

See article. Apparently Legg Mason own UGL stock, their analyst reckons DTZ is worth $1.3-1.5 billion. Suspect the pressure is going to be applied to get the DTZ deal done.

Cheers

 

[ROE]

lot of brokers reckon if it cant get DTZ deal done soon it need capital raising.
Freeze dividend and conserve cash seem they maybe under a bit of pressure with cash flow and capital.

 

[McLovin]

I'm wondering if/suspecting ASX listing rule 11.2 will mean any trade sale will have to go to shareholders for a vote.

You're could be right, I guess it depends how one defines "main undertaking".

I'll probably end up missing out, but I think I'd be happy with the self-discipline. Which probably makes no sense!

 

[craft]

I'll probably end up missing out, but I think I'd be happy with the self-discipline. Which probably makes no sense!

Makes lots of sense - probably something for me to think about

Position sizing for a trade as compared to a conviction investment is way smaller and regardless of the outcome Reality is I'm probably better off spending any time consumed by trading UGL in finding a new investment opportunity.

 

[McLovin]

I've been rolling this around in my head for a couple of days. What do you think the engineering business is worth? I'm actually not seeing much upside if a deal is done $1.3b. If you assign a value to the engineering business of ~$650m (which is based on a more normal EBIT) then the valuation right now looks pretty full.

This is of course based on the presumption that DTZ is sold. I guess what I'm saying is that Street Talk seems to be getting fed info that indicates the sale price will be at the low end. If, as craft suggested above, shareholders need to vote then I doubt they'd agree. Which may explain the sp strength