CIMIC, UGL rise on speculation of rival bid

Shares in engineering giant CIMIC and its takeover target UGL rose yesterday as investors awaited a board meeting.

Ichthys onshore processing facilities in Darwin. Picture: Shaana McNaught

Shares in engineering giant CIMIC and its takeover target UGL continued to gain yesterday as investors awaited a board meeting to discuss the surprise takeover bid and make a recommendation.

UGL closed at $3.19, up 1c for the day and 4c above the $3.15 offer price, as investors speculated on a rival bid — potentially from a private equity fund — to counter CIMIC, the locally listed company formerly known as Leighton Holdings.

CIMIC surprised investors on Monday when it snapped up 13.8 per cent of the company from institutional investors and declared a final and unconditional offer for the rest of UGL, valuing it at $5.84m.

Deutsche Bank — which upgraded UGL to a buy last Friday, ahead of the bid — said a buyer could lift the offer price to $3.78 and still generate a 19 per cent internal rate of return.

Analyst Craig Wong-Pan said in a note to clients that the company had attractive market exposures, while 71 per cent of its revenue was recurring and 68 per cent of it was unrelated to the mining industry.

CIMIC’s bid price of $3.15 would deliver a 22 per cent IRR and allow the Spanish-controlled CIMIC to save millions in costs, including subcontractors for electrical and signalling work, board, support, ASX listing, property and administration services.

Deutsche rated CIMIC a sell, however, with a price target of $23.20 against its $27.86 close yesterday, up 39c on the day.

But it said a bid could add 8-13 per cent to earnings per share between 2017 and 2020.

Broker Shaw & Partners valued UGL at $2.20 a share ahead of the bid and said the bid price looked “a very compelling deal for UGL shareholders’’.

CIMIC has become a consolidation player in the market, having already mopped up Queensland-based contractor Sedgman at a time when there was a “nebulous outlook’’ for the industry and poor metrics including falling margins, a top line under pressure, weak utilisation rates and low capital expenditure.

“Given UGL’s current earnings trajectory over the next two to three years for which it has provided guidance, and the paucity of earnings growth ... this is a very compelling deal for UGL shareholders,’’ Shaw said.

UGL’s share price halved this year after it booked a second provision against its work on the Ichthys liquefied natural gas plant in the Northern Territory, this time worth $200m, and reported a $103m bottom line loss.

The company has maintained it is not at fault for the delays that led to the provision and is seeking recovery from the project operators.

But investors believe no recovery and a potential worsening of the Ichthys situation is being factored into company’s share price, making for an opportunistic bid if UGL was able to recover the $375m in provisions.

Shareholders said they wanted more guidance from the company about whether there would be more provisions or they could be recovered before deciding whether to accept the bid.