United’s ugly result

Engineering and property firm, United Group (ASX: UGL) has today reported a net profit after tax of $26 million, for the six months to December 2012. That’s 53% below the $55.4 million it made in the previous year.

Cancelled and delayed projects saw revenues fall 13% to $2.1 billion, and re-branding and restructuring costs of $26 million hit earnings. Adjusted earnings per share were down 29% to 30.7 cents, and the company declared a 50% franked dividend of 34 cents. With a payout ratio of more than 100% of earnings, United may be trying to placate investors over the poor result, but that can only work for so long.

The company also reported disappointing operating cash flow of negative $40.3 million, as cash receipts from customers fell by more than $400 million.

The company’s engineering division saw sales fall 34% to $907.5 million, hit by project delays and earnings were also hit by falling margins. Operations & Maintenance also performed poorly, with sales down 20% to $261.6 million, and margins slipped. The only bright spot was the company’s Property division, which reported a 36% increase in sales to $920 million, and a slight rise in future orders.

The overall order book fell to $9.3 billion, with Rail and Property Maintenance & Services divisions accounting for the majority of that.

United revised down its full year underlying profit to between $150 to $160 million, below analyst expectations, and lower than the $168 million, recorded in 2012. It also means the group needs to have an exceptional second half to meet those results.

Like other engineering and services companies, Transfield Services (ASX: TSE), Downer EDI Limited (ASX: DOW) and Programmed Maintenance Services (ASX: PRG), United suffers from very low margins, and is likely to focus more on its property management division, which manages properties as diverse as the Sydney Opera House, airports, prisons and Caltex service stations.

Foolish takeaway

With a large chunk of debt, low profit margins, a low return on equity and operating in highly competitive industries, we’d need a significant margin of safety to consider an investment in United (if at all). At current prices we can’t see one.

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