Mining slowdown changes UGL business

Belt tightening in the mining industry has prompted engineering firm UGL to change its business model and downgrade profit targets after a fall in first half profit.

Analysts are concerned UGL's main engineering business will continue to come under pressure after the company reported a 53 per cent slump in first half profit due to $25 million in restructure costs.

Shares in the company shed 60 cents, or 5.5 per cent, to close at $15.87 on Wednesday.

UGL recently cut 200 permanent jobs and shed more than 500 contract positions in the half.

Chief executive Richard Leupen said the company had to look beyond its engineering business as clients in the resources sector looked to reduce costs, defer capital expenditure and find alternative investment locations.

"We need to have diversification into other sectors to replace the slowing sector," Mr Leupen told AAP.

The mining services sector was headed for leaner times as oil and gas companies countered project deferrals, cost overruns, a high Australian dollar, project delays and project blowouts.

"If they defer capital spending, cut back maintenance budgets and cut costs, that clearly puts pressure on the sector.

"For us we need to ensure we have alternative markets opening up."

UGL made a net profit of $26 million in the six months to December 31, down from $55.4 million in the previous corresponding period.

Underlying net profit, which excludes the costs of its restructure and rebranding of one of its businesses, was $51 million in the six months to December, down from $72.2 million in the previous corresponding period.

The company has forecast an underlying net profit in the full 2012/13 financial year of between $150 million and $160 million, down from its previous guidance of $170 million to $185 million.

Volatility in commodity prices continued to result in cancellations and delays of major projects in the resources and infrastructure sectors, leading to a delay in the major projects pipeline for financial year 2013.

Mr Leupen said cost overruns on several infrastructure projects also contributed to the weaker performance.

UGL said its property and rail businesses were expected to continue to perform strongly, helping to offset the impact of engineering project delays.

IG Markets market strategist Evan Lucas said mining services companies such as UGL could be heading for a year of consolidation in fiscal 2014.

"Miners' discretionary spending is going to get squeezed," Mr Lucas said.

He said UGL had the advantage of being more diversified than other companies, but most of its earnings still came from engineering.

"Engineering is really hurting. That's the big concern."

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