UGL Limited’s shares slammed down 14%: Here’s why

Diversified services company UGL Limited (ASX: UGL) has seen its share price crash down more than 14% to $5.92 in mid-afternoon trading, after the company warned of cost blowouts on a one of its projects.

On the second page of an announcement, was a market update that a consortium that it is a part of has seen forecast project costs increase, resulting in a provision of USD$170 million. The consortium, comprised of UGL, GE and CH2M of Denver, Colorado are building a power station for the Ichthys LNG Project on the West Australian coast.

UGL says it will update the market on the issue at its half year results in February, or earlier, once it is in a position to reliably measure the financial outcome of the project. In other words, UGL has no idea how much the issue above will end up costing it. It could be minimal – or substantial.

And therein lies one of the issues with contracting companies. It’s all well and good winning multi-million dollar contracts, but delivering those contracts on time and on budget can be exceptionally difficult. So when you see a contracting company announce a big contract win – take the news with a dose of salt.

As Titan Energy Services Ltd (ASX: TTN) found out last month, contracts don’t have to be automatically rolled over and can be cancelled. Ausdrill Limited (ASX: ASL) found that lower iron ore prices crippled one of its major customers, which ended up in administration, and who knows if Ausdrill will receive the $8 million it is owed.

Earlier this week, it was Watpac Limited’s (ASX: WTP) turn, after it received similar news to Ausdrill. One of Watpac’s iron ore customers had appointed receivers. Now the expected $50-$60 million in revenues is highly unlikely to be seen, creating a big hole in expected earnings.

UGL shareholders did receive some good news at least today. The company will pay shareholders $3 per share, being the proceeds from the $1.2 billion sale of the company’s property arm, DTZ. The $3.00 will be comprised of a capital return and a small unfranked dividend component, and is expected to be paid on November 27.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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