UGL Limited and Austal Limited: 2 up-and-coming stocks for your portfolio

Engineering and heavy manufacturing companies are not hot industries currently because of real issues concerning high production costs, lower mining activity and weaker commodity prices.

Despite that, there are some companies that are still moving ahead and stick out from among the crowd. Investors should know about their business and understand how they could grow in the short and mid-term. The issues listed above will eventually turn around as the economy goes through its regular business cycle.

Austal Limited (ASX:ASB) is a global defence prime contractor, which constructs ships for the Australian, US and Middle East navies, as well as for commercial purposes. The ships can be high speed support vessels, combat ships or commercial ferries.

Over the last four years, revenues were rising, yet net profit was slipping down. In 2013 that changed, with net profit back up to $35.9 million and in line with previous years. This improvement continued in the first half of FY2014 and the company also paid down debt with cash from operating activities.

Its share price is up about 42% in the last six months and is $1.07 now. Its PE is 10.3 and it pays no dividend.

Engineering, property services provider and asset manager UGL Limited (ASX: UGL) saw business rise with the mining boom like many other engineering and mining services companies. Things changed abruptly in 2013 when revenue was down and underlying net profit went from $168.3 million to $92.1 million.

FY2014 interim results showed first half underlying net profit was only slightly down on the previous corresponding period, partly thanks to a strong turnaround in the UK property market. Its property service company DTZ is to be spun off as a separate entity.

Private equity groups are also possibly interested in acquiring the business if the company decides not to de-merge. Some possible figures are suggesting a 10 times earnings multiplier which could mean a sale value of around $1.3 billion.

Its share price is down about 14% in the last six months, hitting lows of about $6 in February. Currently it is $6.82. Its PE is 10.9 and it offers an attractive 5.7% dividend.

Foolish takeaway

The demerger of DTZ and UGL creates a good opportunity for the company to capitalise on a rising property market through either a float or trade sale. This will be very beneficial for the engineering business, providing capital as it is seeing more infrastructure projects coming up.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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