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UGL is the latest victim in mining services

Diversified engineering firm UGL (ASX: UGL) led the mining service sector down on Tuesday with its share price down a thumping 15%. The drop was in response to an earnings downgrade issued by the company.

The downgrade revised expectations for underlying net profit after tax (NPAT) to around $90 million, which compares with last year’s underlying NPAT of $168 million. The one positive from the announcement was an update on the potential spin-out of the DTZ operating division, with management suggesting that a demerger appeared the most likely option.

UGL’s downgrade makes the firm the latest mining service provider to join the growing list of casualties from the resource boom fall-out. Tuesday also saw minnow Global Construction Services (ASX: GCS) guide market expectations lower. In financial year 2012, Global Construction Services produced earnings before interest, tax, depreciation and amortisation (EBITDA) of $50 million, management now believes that for the current 2013 financial year EBITDA will fall around 10% to roughly $45 million. Pleasingly, management’s outlook suggested “expected improvements in financial performance in FY14”.

These downgrades certainly don’t help the bleak outlook for many mining and mining service companies. While the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) lost around 0.75%, the losers were dominated by mining service stocks, including perennial favourite Monadelphous Group (ASX: MND), which fell over 9%. Meanwhile a number of industrial stocks, including Carsales.com (ASX: CRZ) and Singapore Telecommunications (ASX: SGT), were doing well, with their shares up 3.3% and 2.7% respectively.

Foolish takeaway

As UGL’s result shows, the business model of many mining service firms leaves them wide open to a slowing resource sector. Motley Fool Analyst Scott Phillips has long advised investors to steer clear of mining service companies. Good advice, as right now there are value traps everywhere in the sector.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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