- Rail update shows both opportunities and challenges for UGL
- Earnings guidance reiterated, brokers make only minor changes to forecasts
- Broker opinions on UGL remain divided between Buy and Hold


By Chris Shaw

Engineering and infrastructure group UGL ((UGL)) held an investor day at its Newcastle Rail Facility yesterday, one that saw management highlight what is a positive 3-5 year demand outlook for the business. This growth potential reflects the resources boom, passenger growth and the need to replace older existing rail fleets.

The current project pipeline for UGL is strong, Macquarie noting there has been an increase of 23% since December. The issue is there is something of a time lag for increased demand flowing through to actual orders, something UGL needs to provide renewed momentum in the order book and to support earnings expectations for FY12.

Citi notes while the update showed locomotive demand remains strong, there is increasing competition from Chinese-built locomotives. These alternatives are up to 40% cheaper than locally manufactured locomotives, though reliability of the Chinese models remains an issue.

Medium-term Citi expects the Chinese to improve the reliability of their product offerings, which translates into increased pricing pressure and loss of market share for UGL over a 3-5 year time-frame.

Given the competitive outlook, management at UGL is targeting increased cost savings in an attempt to maintain margins. Citi points out savings will potentially come from improved production processes, low-cost sourcing and better supply chain operations.