The reasons for the divorce at engineer and services group, UGL are no different to the separations seen in the Murdoch media empire, at Amcor, the old Fosters, Brambles or a host of other companies.
After creating a bigger company in the hope of higher profits, market and sector diversification, currency benefits and the much searched for ‘synergies’, companies become disappointed when they don’t appear in sufficient quantity to justify the cost of expansion.
Shareholders get grumpy as sales and earnings stagnate or fall – especially if the CEO and board remain oblivious and/or continue to reward themselves on the basis of the projections made at the time of the merger or acquisition.
The latter was a big irritant for engineering and property services group, UGL, which revealed in March that it was contemplating a separation of its $1.9 billion a year (sales) subsidiary, DTZ – now that’s turned into a split.
A 70% plus fall in net profit for the year on a 14% plus drop in revenue tells us the big UGL idea has failed – now it’s the divorce route to try and boost corporate performance at the engineering parent.
This underperformance at UGL in the year to June will hurt shareholders in the wallet – total dividends for the year are down a massive 44% to 39c, from 70c a share. An unfranked final dividend of 5c a share will be paid (to maintain payout ratio at 70% of profit).
That unfranked final tells us two things – the first is that the second half was miserable with the costs of the reorganisation weighing heavily, the second is that the company didn’t generate enough taxable profits in the half year to be able to use its franking credits.
Driving the push to split was the weak financial performance of the whole group – that again appeared in the full year results for UGL yesterday.
Net profit for the year to June slid 70% to just $41.7 million in the year to June, from $135.4 million a year earlier.
Underlying net profit for the year was higher at $92.1 million. The difference was due to the cost of an internal reorganisation being expensed. But even that was down more than a third on the 2011-12 year’s performance.
UGL YTD – Split News Cheers UGL Investors
UGL CEO Richard Leupen said the company’s engineering business had suffered due to a slowdown in capital investment in the resources and infrastructure sectors.
As a result, revenue fell a worrying 14.2% to $3.8 billion.
So now the property services bit called DTZ will be separated and is expected to be completed in two years (why it is taking so long when Amcor’s split will be concluded by the end of 2013 is a bit hard to understand).
DTZ saw revenue rise 21% to $1.9 billion for the year helped by strong contributions in Asia and the US property market. DTZ"s earnings before interest and tax rose 19% to $113.4 million.
Looking to 2014, Mr Leupen said: “As we start the 2014 financial year, UGL is well placed to respond to the challenging operating environment in Australia given its broad base of recurring revenues, which comprise approximately 85 per cent of our $8.3 billion order book.
“The combined revenue base in property services, rail and industrial maintenance generates approximately $3 billion annually and is expected to continue at that rate into FY2014 and beyond. This base will provide some degree of insulation against the slowdown being experienced in the Australian resources and infrastructure sector. In addition, approximately half of Group earnings are currently generated offshore.
“We anticipate DTZ will grow in line with its key markets and continue to perform solidly in FY2014 given its favourable positioning in the recovering North American markets and exposure to the growth potential in Asia, particularly China. The new property systems rollout is proceeding to plan and expected to be completed by March 2014, providing DTZ with a distinct competitive advantage.
“For Engineering, a combination of its order book (which is already 70 per cent sold for FY2014) and targeted growth opportunities should see UGL operate in FY2014 at similar revenue levels to FY2013.
“With the restructuring of UGL’s cost base now largely complete, we expect to return to more normalised trading margins in the 2014 financial year. When considered together, UGL expects underlying NPAT of between $120- 130 million in FY2014, subject to a continued reasonable economic outlook.”
The market loved the news of the divorce, the shares rose 1.7% or 13c to $7.53.
