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UGL cuts dividend as profits falls

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A fall in profit has led engineering firm UGL to cut its final dividend by more than 80 per cent due to the mining slump.

It comes after UGL announced it will demerge into two different companies, with a property services business and an engineering, construction, and maintenance firm.

The Australian reported the company will attempt to make its international property arm grow for another year to boost earnings before it demerges in 2015.

Chief executive Richard Leupen said net profits should bounce back to as much as $120 million-$130 million.

This is after a drop in profit to $36.5 million, which includes a drop in revenue, and writedowns and restructuring expenses on five projects.

“It was probably the toughest year I have had in my 13 years at UGL,” Leupen said.

“We expect to return to ore normalised trading margins in the 2014 financial year.”

Underlying profit stood at $92 million.

But analysts predicted this after the company issued two downgrades from its previously expected $160 million.

The downgrade in profits and cuts in dividend come amid the mining slump, as demand for services and contract employees takes a hit. Mining companies are postponing and downgrading new and existing projects in an effort to cut costs.

While Leupen said the company had been dealing with its engineering business for costs in the past year to survive amid the mining slump, he said the downturn was almost at its lowest.

UGL slashed its dividend payout to an unfranked 5c a share, from 36c in 2011-12, which brings it to 39c a share for the year, down from 70c.

UGL slashed 700 jobs and recently cut $20 million in costs. It came after a 15 per cent drop in its share price.

According to Leupen, 85 per cent of the company’s $8.3 billion order book was recurring  revenue, while its property arm and rail and industrial maintenance was providing $3 billion in revenue.

This is buffering them from the mining downturn to a certain extent, he said.

The company is also receiving half its earnings from overseas, with the engineering business’s order book already 70 per cent full.

UGL said the structural separation of its property services business (DTZ) and its engineering, construction and maintenance firm was the best option.

“Following the establishment of the global headquarters for DTZ in the United States, UGL increasingly saw the benefits of operationally separating DTZ and Engineering,” Leupen said.

He said buying DTZ for $110 million less than two years ago had given UGL the opportunity to win international contracts with the likes of Rolls-Royce, Yahoo and Texas Global, while generating an additional $505 million in revenue.

“It was not the revenue alone that attracted us. It was the capability and global reach,” Leupen said.

The demerger will take 18 months and will involve hiring employees, choosing a board and setting up a balance sheet.

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