UGL Limited profit jumps 55% but is still no rose

Photo: OzinOh Flickr

UGL Limited (ASX: UGL) an engineering, contracting and services company, today reported a 55% increase in net profit of $18.5 million for the six months to end of December 2015. That’s no big deal really, coming off such a small base.

UGL has four divisions, with Rail & Defense delivering the lion’s share of revenues at 41%, followed by Engineering & Construction with 26%, Asset Services 24% and Technology Systems with 9%.

The company saw revenues of $1,187.4 million, down slightly on the first half of the 2015 financial year (1H FY15), but managed to produce an underlying profit of just $18.5 million, compared to $11.9 million the previous year. Operating cash flow was a shocker, with the company reporting just $3 million for the period – compared to a loss of $3.6 million in the 1H FY15.

As you might expect with such a small profit, no dividend was declared, continuing the theme since 2013.

UGL’s profit margin rose slightly from 1.0% to 1.6%, which is extremely skinny by anyone’s standard, and highlights the major risk of investing in services companies like UGL and related companies such as Broadspectrum Ltd (ASX: BRS) ex-Transfield Services and Programmed Maintenance Services Limited (ASX: PRG). All three have ultra-low margins, despite billions of dollars in revenues and virtually zero competitive advantage.

An additional issue is that UGL’s revenues have hardly changed in four years, suggesting that no matter how hard management run, the business has weak fundamentals.

Competition for contracts is intense, and with such small margins, one misstep can lead to disaster – as has happened numerous times in UGL’s chequered history. Over the past 10 years, UGL has returned shareholders a loss of 34% and a loss of 58% over the past five years, according to data provided by S&P Global Market Intelligence. Not exactly a glowing endorsement of the company’s business, strategy, sector or management for that matter.

About the only good news is that UGL has a net cash position of $23 million, with 117 million in cash versus $94 million of drawn debt.

Foolish takeaway

Market commentators, brokers analysts, and fund managers might have some interest in UGL thanks to its inclusion in the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO). But UGL really is the ugly duckling of the ASX and there are better opportunities out there.

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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

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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