Shares in engineering group UGL (UGL) jumped more than 6% yesterday, resisting the widespread selling from nervous investors after it unveiled plans to cut 200 jobs and warned of the possibility of new writedowns.
Normally news like that would make investors nervy, but UGL has been a bit of a problem company (and has already revealed a big set of writedowns and a review of the company) so yesterday’s news came as something of a reassurance that there’s nothing too dramatic about to happen.
UGL shares closed up10.3% at $2.56, well above its $2.18 a share start to the year.
UGL said it was looking to save an estimated $33 million a year from the 2015-16 year by sacking 200 full time employees (at a one off cost of nearly $37 million) and removing the “duplication of roles” associated with the $1.2 billion sale of its property arm DTZ last year.
“We are well advanced in a significant overhead restructure program to right size the organisation for a new business structure,” the company said in an update to the ASX yesterday. The company said it plans to create a lean (and presumably lower cost) corporate centre and handle all high risk projects in the one area of the group.
UGL said it will also take $74 million of one-off charges and provisions in the second half of the current financial year to “complete the reset of the business” including restructuring and property consolidation costs, removal of previous capitalised tender costs and further write-downs associated with continued settlement of “long-dated work in progress and dispute claims”.
UGL forecast underlying earnings before interest and taxation of $47 million in fiscal 2015 (excluding income from DTZ), and revenues of $2.3 billion.
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The company said it believed $175 million of previously-announced provisions for the troubled Ichthys power project in the Northern Territory were “adequate”.
"Since the first half result announcement, the project has stabilised with productivity targets being achieved and performance in line with the revised cost to complete," UGL said.
Construction of the project, which is being built in a joint venture with US engineering firm CH2M Hill, is 30% complete, but heavily over the initial budgets.
CEO Ross Taylor said in the statement that 2015-16 revenues would be “in line” with those in 2014-15, with profit margins, which have been running at less than 3%, expected to return to that level and rise “towards 4%” in 2016-17.
“We expect that in fiscal 2017 there will be a substantial step change in revenue of at least $300 million driven by UGL’s exposure to transport infrastructure and LNG maintenance,” Mr Taylor said.
"We have already secured or are preferred on new contracts which underpin this growth."
Mr Taylor, who replaced long time CEO Richard Leupen last November, has spent the past few months undertaking a detailed review of UGL’s projects together with new chief financial officer Ray Church.
The strategy sounds a lot like what we heard last week from ALS and Programmed Maintenance Group as they target growth areas away from the mining and resource sectors.
While UGL isn’t giving up on transport and the LNG sector, it will have to win new deals outside those areas to generate growth, with contracts at higher yields to enable the company to boost profit margins over the next 18 months to two years.
