Overview
John Wood Group PLC (WG) is an Aberdeen, Scotland-based energy services company, which provides performance-driven solutions throughout the asset life cycle. The company’s operations were started way back in 1848. The company focused on engineering, drilling services, and oilfield logistics & supplies. Today it has grown to become a global leader in the delivery of project, engineering and technical services in energy and provides a range of engineering, maintenance management, pipeline services, decommissioning services, digital solutions, clean energy, production support, and repair services to the energy industry. The company employs around 60,000 personnel across more than 400 offices operating in more than 60 countries.

The group provides comprehensive services to support its customers throughout the asset life cycle, from concept to decommissioning, through specialist consultancy services, project-based delivery or long-term contracts. The company targets a broad range of industrial markets, including a range of energy, process and utility markets, and combines its global experience, innovative ideas and solutions, and a flexible approach to serve its customers efficiently.

Key Statistics


Management
Ian D. Marchant is the Chairman of the Board; he was appointed to the position in 2014. He has previously held various management positions as Chief Executive and Chairman in other companies. Robin Watson was appointed as the Group Chief Executive in January 2016. David Kemp is the Chief financial officer.

Segments
The group's operations are differentiated in five operating segments: Assets Solutions Americas (‘AS Americas'), Asset Solutions Europe, Africa, Asia, Australia (‘Asset Solutions EAAA'), Environment and Infrastructure Solutions (‘E&IS'), Specialist Technical Solutions (‘STS') and Investment Services. Asset Solutions, which is further divided into geographical segments, focuses on reducing cost, increasing production, extending asset life, and improving efficiency across the energy and industrial markets. It provides construction, initial design, maintenance, decommissioning and operations services. Specialist Technical Solutions caters to a broad range of energy and industrial sectors and aims at solving complex technological challenges through a variety of specialist services. E&IS offers project and construction management, engineering and consulting services to a range of sectors.

Top Shareholders

(Source: Thomson Reuters)

Recent News
The group on 25th March 2019 announced that it has agreed to sell its Terra Nova Technologies business to Cementation Americas for $38 million, further progressing on its non-core asset disposal programme. This was in addition to the series of disposal of interests in non-core assets undertaken in December 2018.

Key Financial Metrics (FY 2018, in $m)
 
(Source: Company Filings)

Key Financial Highlights (FY 2018)
Performance in 2018 was at the upper end of guidance and ahead of market expectations and reflects good organic growth, helping the company to return to growth in FY 2018. Revenue including joint ventures surged by 12% to $11,036m against proforma revenue of $9,882m reported in 2017, supported by favourable conditions in the wide range of energy and industrial end markets. Adjusted EBITA rose by 5.4% on a proforma basis, leading to adjusted EBITA margin of 5.7%, while operating profit before exceptional items was $357m. Although operating profit before exceptional items and adjusted EBITA faced headwinds from a slower than anticipated sector recovery in oil and gas and continued competitive pricing environment, they benefitted from cost synergy delivery of $55m in 2018. Due to exceptional costs of $183m net of tax, the loss for the period was negative $7.6m, improving from a loss of $30m reported in 2017. Adjusted diluted EPS rose by 7.7% to 57.4c and was ahead of 2018 consensus. A final dividend of 23.7c, representing an increase of 2%, was proposed by the group, leading to a dividend cover of 1.6x. In line with the guidance at December trading update, net debt reduced to $1.5bn, leading to a reduction in Net debt to adjusted EBITDA to 2.2x at the end of the year (FY 2017: 2.4x).

Financial Ratios

(Source: Thomson Reuters)

Ratios Commentary
The company's profitability margins are significantly below the industry median. However, net margin, operating margin and return-on-equity showed an improvement in the latest period against last year data, reflecting growth in revenue. Liquidity ratios declined during the year and are below the industry. Moreover, the quick and current ratio has remained approximately equal, indicating the company holds most of its current assets in liquid form. The company assumed more leverage in 2018 but was still below the industry. The asset turnover ratio is higher than the industry and improved in 2018, indicating optimal utilisation of resources.

Valuation Methodology
Method 1:Price/EarningsMultiple Approach (NTM)
 
 
Method 2: Price/Cash Flow Multiple Approach (NTM)


To compare WG with its peers, Price/Cash Flow multiple has been used. The peers are Petrofac Ltd(NTM Price/Cash Flow was 5.22), Saipem SpA(NTM Price/Cash Flow was 6.84),Subsea 7 SA(NTM Price/Cash Flow was 7.44), Hunting PLC(NTM Price/Cash Flow was 11.08), Aker Solutions ASA(NTM Price/Cash Flow was 11.65), TechnipFMC PLC(NTM Price/Cash Flow was 13.40) and Vallourec SA(NTM Price/Cash Flow was 15.15). The mean of Price/Cash Flow (NTM) of the company’s peers was 10.11x (approx.).

*All forecasted figures and Peer information have been taken from Thomson Reuters.

Share Price Commentary
 
Daily Chart as at April-17-19, before the market closed (Source: Thomson Reuters)
 
On April 17, 2019, at the time of writing (before the market closed, at 11:55 am GMT), WG shares were trading at GBX 524.60, up by 1.15 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 801.20/GBX 481.00. At the time of writing, the share was trading 34.52 per cent lower than its 52w High and 9.06 per cent higher than its 52w low. Stock's average traded volume for 5 days was 2,161,717.80; 30 days – 3,245,783.57 and 90 days – 2,775,510.13. The average traded volume for 5 days was down by 33.40 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 11.9x. The company's stock beta was 0.76,reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £3.55 billion with a dividend yield of 5.14 per cent.
 
Growth Prospects and Risks Assessment 
The company had to take on substantial debt to fund the acquisition of Amec Foster Wheeler; as a result, its leverage is currently higher than the targeted range of 0.5-1.5 times net debt to Adjusted EBITDA. It will be imperative for the group to generate cash as well as grow profitability to repay the debt. Failure to meet this expectation poses a key risk to the company, and the company is under market pressure to realise revenue synergies and organic growth following the completion of the acquisition. During 2018, the company reported good trading momentum and cost synergy delivery, helping it to return to growth. The company is making good progress on non-core asset disposal programme, helping it to focus on core business and improve efficiency. Higher activity levels across all business units along with a strong pipeline of opportunities and excellent progress on cost synergies augurs well for the company. The company is in a good position for growth trends emerging across a broad range of industries which will help to post a targeted organic growth rate of 5%, helping to improve adjusted EBITA. At $10.3bn, the order book is solid and represents 60% of forecasted 2019 revenue.
 
Conclusion
The company has implemented an enhanced risk management framework and is confident about the strong free cash flow generation of its business. Driven by earnings growth in 2019, further deleveraging is expected to be undertaken. Based on strong financials and supported by valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 518.6 (as on 16th April 2019) with high single-digit upside potential based on 10.11x NTM Price/Cash Flow (approx.) on FY19E cash flow per share and 10.00x NTM Price/Earnings Value (approx.) on FY19E earnings per share.
 
*The buy recommendation is valid for the current price as covered in the report (as on April-17-19).

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