##{"id":59721,"date":"2012-03-28T11:09:38","date_gmt":"2012-03-28T00:09:38","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/03\/28\/time-to-own-ugl-says-goldman-sachs\/"},"modified":"2012-03-28T11:09:38","modified_gmt":"2012-03-28T00:09:38","slug":"time-to-own-ugl-says-goldman-sachs","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/03\/28\/time-to-own-ugl-says-goldman-sachs\/","title":{"rendered":"Time To Own UGL, Says Goldman Sachs"},"content":{"rendered":"

\n\t – UGL<\/span> has underperformed<\/span> over the past 12 months
\n\t – A recovery in earnings growth should reverse this trend
\n\t – Goldman Sachs reiterates a Buy rating<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tA lack of earnings growth and some uncertainty with respect to the recent DTZ<\/span> acquisition has contributed to UGL<\/span> Ltd ((UGL<\/span>)) underperforming the market over the past 12 months. As noted by Goldman Sachs, UGL<\/span> generated earnings growth of around 9% in FY11<\/span> and is on course for growth of about 5% this year, well below others in the engineering and contracting sector.<\/p>\n

\n\tThe stockbroker predicts double-digit earnings growth will return from FY13<\/span> onwards, helped in part by some signs of improvement at DTZ<\/span>. This is important, as the DTZ<\/span> acquisition increased UGL's<\/span> exposure to property services. This created some confusion in the market as to whether UGL<\/span> was an engineering services provider or a property services company.<\/p>\n

\n\tThe combination of a better growth outlook and improvements at DTZ<\/span> leads Goldman Sachs to suggest now is the time to reconsider the stock.<\/p>\n

\n\tDriving the anticipated improvement in earnings should be further growth in the underlying business and a turnaround at DTZ<\/span>, with margins expected to improve in coming periods. Assuming such an improvement, the business should contribute EBITA<\/span> (earnings before interest, tax and amortisation<\/span>) of $20-$25 million in FY13<\/span>, which is meaningful from a group earnings perspective.<\/p>\n

\n\tThere are potentially some additional shorter-term catalysts for UGL<\/span>. A frigate maintenance contract has already been won and is a positive for sentiment, while Goldman Sachs notes the group is tendering for some structural, mechanical and piping contracts with BHP<\/span> Billiton<\/span> ((BHP<\/span>)) in Western Australia and appears well placed to possibly win one of these contracts.<\/p>\n

\n\tGoldman Sachs is forecasting earnings growth in FY13<\/span> of 15% and in FY14<\/span> of 13%. In earnings per share (EPS) terms this translates to 120.5c in FY13<\/span> and 136.2c in FY14<\/span>, up from a forecast 90.5c this year. By way of comparison, consensus EPS forecasts for UGL<\/span> according to the FNArena<\/span> database stand at 103.8c in FY12<\/span> and 116.5c in FY13<\/span>.<\/p>\n

\n\tOn the forecasts of Goldman Sachs, UGL<\/span> is trading on a FY13<\/span> earnings multiple of 10.5 times at current levels. This appears attractive assuming earnings growth does return to double-digit levels in that year. <\/p>\n

\n\tDuring its recent underperformance<\/span> UGL<\/span> appears to have been used as a funding stock for other investments in the sector with better short-term earnings potential. Goldman Sachs sees scope for this trend to reverse in coming months as the market begins to price in the improved earnings growth outlook from FY13<\/span>.<\/p>\n

\n\tPost a review Goldman Sachs has retained its price target on UGL<\/span> of $15.50, which compares to a consensus price target according to FNArena's<\/span> database of $14.31. Targets in the database range from RBS<\/span> Australia at $13.02 to Citi<\/span> at $15.26.<\/p>\n

\n\tGiven an expected 12-month total return from UGL<\/span> of around 28%, Goldman Sachs continues to rate the stock as a Buy. Most in the database agree, as UGL<\/span> is rated as Buy five times compared to two Hold ratings.<\/p>\n

\n\tCredit Suisse is one of the brokers with a Buy on UGL<\/span>, having upgraded from a Neutral rating earlier this month. The upgrade followed a sector review that generated some positive earnings revisions and was enough for the broker to list UGL<\/span> as its preferred sector exposure.<\/p>\n

\n\tShares in UGL<\/span> today are higher and as at 10.50am the stock was up 2c<\/span> at $12.70. This compares to a range over the past year of $10.95 to $16.48. The current share price implies upside of around 13% relative to the consensus price target in the FNArena<\/span> database.<\/p>\n

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