UGL shares react to mining slump

Diversified engineering firm UGL is the latest to feel the heat of the mining slump, with a 15 per cent drop in it share price. The slump comes as the company issued an earnings downgrade.

Mining services contractors are feeling the effects of the mining downturn and are being compelled to cut earnings estimates and warn of possible writedowns as project delays and cancellations trickle down the mining sector.

The estimate cuts modified forecasts for underlying net profit after tax (NPAT) to approximately $90 million, compared to last year’s underlying NPAT of $168 million, Ninemsn reported.

UGL joins a swelling list of companies bearing the fallout from the resources downturn. Global Construction Services also downgraded their expectations on Tuesday.

While their earnings before interest tax, depreciation and amortisation was $50 million for financial year 2012, management now predicted a 10 per cent dip in this number to $45 million for financial year 2013.

Falling commodity prices and a lower Australian dollar did not comfort the mining sector.

Hedge funds are said to be diverting their concentration from the Australian currency to the miners and their service companies as they continue with profit warnings.

Chief executive Richard Leupen said while several infrastructure projects were also struggling, the failure of projects in the resources sector was the main reason for the estimate cuts.

“We’re still winning work but we had about $250 million in this half that was either deferred, delayed or cancelled,” Leupen told The Australian.

“It’s the downside of a boom cycle. But there will be another up cycle – a big one at some point – but this particular cycle is unquestionably on the downhill side of its top.”

Leupen added existing resources projects were operating from money committed to projects from decisions made in 2010 and 2011, but forward indicators for consulting engineering firms were ‘very very quiet’, with lower profits predicted for the sector.

“You add the whole sector up and altogether we’re taking (about) $80 billion of projects out of it in the years ahead – that’s significant,” he said.

UGL announced it will cut 1000 jobs in February after it downgraded its earnings guidance, with 700 jobs cut from Australian operations.

The company pointed to first half net profit slump of about 30 per cent on project delays and cancellations for the job cuts.

Leupen had predicted the resources cycle was on its way down from the boom, although he did not expect a ‘nosedive’.

Engineering firm Sedgman also said its annual results would be below expectations due to the resources downturn, delays and ‘project slippage’.

Analysts at the Commonwealth Bank said the contractor stable is in for more pain after holding meetings in the last month with companies in the mining, oil, gas, civil and building construction industries.

“Overall feedback suggests revenues for the space are likely to be down significantly in the 2014 financial year, with visibility in FY15 highlighted as a major concern,” analyst Ben Brownette said.

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