Why the UGL Limited share price has crashed today

UGL Limited (ASX:UGL) share price plunges 27.5% to $2.50

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

UGL Limited has seen its share price plunge more than 20% in early trading after the engineering and services company warned it could face up to $200 million of contract losses.

In early trading, the UGL share price is down 27.5% at $2.50.

UGL is a contractor on the Inpex Ichthys LNG project, with a number of contracts and joint ventures. The UGL-Kentz JV is a 50.50 joint venture that was awarded a $740 million contract in February 2014 for the structural, mechanical and piping construction (SMP) package.

UGL also has another 50/50 joint venture with CH2M Hill, which was awarded a $550 million contract for the construction of a combined-cycle power plant (CCPP). In February 2015, UGL was forced to recognise a $175 million provision for the CCPP project, following a reforecast of the cost estimates.

UGL says it has raised claims with both projects with the client JKC Australia LNG Ltd (another joint venture between JGC Corporation, KBR and Chiyoda Corporation), with ongoing delays and disruption attributable to JKC. UGL says the commercial negotiations are becoming protracted and a formal dispute resolution process may be needed.

If the negotiations break down or aren't resolved, UGL could be forced to book up to $200 million in additional provisions – on top of the $175 million already raised.

UGL says that excluding the Ichthys projects, the company continues to perform in line with guidance. The company says it expects to deliver 3% earnings before interest and tax (EBIT) margins on revenues of around $2 billion this financial year (FY16) and 4% EBIT margins on revenues of at least $2.3 billion (both excluding Ichthys).

This situation is one in which many contractors such as UGL, Downer EDI Limited (ASX: DOW), Cimic Group Ltd (ASX: CIM), GR Engineering Services Limited (ASX: GNG) and RCR Tomlinson Limited (ASX: RCR) can find themselves.

Even with the best risk management frameworks and systems in place, problems can occur that the client might be unwilling to pay for and the contractor might have to wear – or a dispute arises over who is responsible.

Foolish takeaway

As much as UGL might like to claim that 'excluding the Ichthys projects' it is performing as expected, the problem is that those projects are material to the company and raising provisions could see UGL make substantial losses on both. No wonder shareholders are abandoning ship today.

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

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »