Overview

John Wood Group PLC (WG) is an Aberdeen, Scotland-headquartered group which provides performance-driven project, engineering and technical services to its customers throughout the asset life cycle. The company’s operations started way back in 1848. The company focused on engineering, drilling services, and oilfield logistics & supplies. Today it is a global leader in the delivery of a myriad of services in energy, industry and the built environment, and provides a range of engineering, pipeline 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 clean energy, environment & infrastructure, power & industrial, oil & gas industrial sectors, 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. With effect from 1 September 2019, he will be succeeded by Roy Franklin. 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.

Top Shareholders


 (Source: Thomson Reuters)

Recent Developments

On 9th May 2019, the group announced that with effect from 1 September 2019, Roy Franklin will succeed the current Chair, Ian Marchant, as Chair of the Board of Directors. Roy has more than 40 years of experience in the energy industry and has been the senior independent director of the company since October 2017.

Key Financial Highlights (FY 2018, in $m)

 
(Source: Company Filings)

Performance during the year was at the upper end of guidance and ahead of market expectations, reflecting good organic growth and 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 which was supported by a favourable conditions in the wide range of energy and industrial end markets.

Adjusted EBITA rose by 5.4%on a proforma basis, leading to an 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 stood at $7.6m and improved from a loss of $30m reported in 2017.Adjusted diluted EPS rose by 7.7% to 57.4c and was ahead of 2018 consensus, while basic loss per share for the year was 1.3 cents per share, against a loss of 7.4 cents reported in the prior year.

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 and supported by a strong operational cash generation, 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).

Key Performance Indicators

Total recordable case frequency (TRCF), which measures a total of lost work cases, restricted work cases and medical treatment cases per 200,000-man hours, reduced by 28% to 0.18, driven by sustained focus on Health, Safety, Security and Environment standards.

Lost work case frequency (LWCF), which measures lost work cases per 200,000-man hours, declined to 0.04, though one fatality related to pressure testing was reported.

Adjusted EBITA margin, which demonstrates the company’s ability to convert revenue into profit, declined to 5.7% in FY18 from 6% in FY17, due to slower sector recovery in oil and gas and a continued competitive pricing environment.

Adjusted diluted EPS (AEPS) increased to 57.4 cents, while Dividend per ordinary share increased by 2% to 35 cents.

Cash conversion, reflecting improved working capital performance, increased significantly to 102% from 69% in FY 2017.

Net debt: adjusted EBITDA ratio, which measures the ability to service debt, decreased during the year to 2.2x, driven by growth in adjusted EBITDA and cost synergy delivery.

Financial Ratios


(Source: Thomson Reuters)

Though bottom line ratios were better than last year, the company’s overall profitability margins are significantly below the industry median. Reflecting growth in revenue, net margin, operating margin and return-on-equity showed an improvement. 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’s assets/equity ratio increased during the year, indicating higher leverage, but is in line with the industry now. The debt/equity ratio is although lower than the industry but is gradually normalising towards the industry’s level. The asset turnover ratio is higher than the industry and improved in 2018, indicating optimal utilisation of resources.

Valuation Methodology
Method 1:EV/EBITDAMultiple Approach (NTM)



To compare WG with its peers, EV/EBITDA multiple has been used. The peers are Petrofac Ltd(NTM EV/EBITDA was 4.56), Saipem SpA(NTM EV/EBITDA was 4.93),TechnipFMC PLC(NTM EV/EBITDA was 5.62), Subsea 7 SA(NTM EV/EBITDA was 5.76), Hunting PLC(NTM EV/EBITDA was 6.36), Aker Solutions ASA(NTM EV/EBITDA was 6.56), and Vallourec SA(NTM EV/EBITDA was 9.13). The median of EV/EBITDA (NTM) of the company’s peers was 5.76x (approx.).
 

Method 2: Price/Earnings Multiple Approach (NTM)


To compare WG with its peers, Price/Earnings multiple has been used. The peers are Vallourec SA(NTM Price/Earnings was -8.54), Petrofac Ltd(NTM Price/Earnings was 6.02), Hunting PLC(NTM Price/Earnings was 11.85), Aker Solutions ASA(NTM Price/Earnings was 14.07),TechnipFMC PLC(NTM Price/Earnings was 15.49), Saipem SpA(NTM Price/Earnings was 22.15). The mean of Price/Earnings (NTM) of the company’s peers was 10.17x (approx.).

Share Price Commentary


Daily Chart as at June-05-19, before the market closed (Source: Thomson Reuters)

On 5^th June 2019, at the time of writing (before the market closed, at 10:30 am GMT), WG shares were trading at GBX 404.60, down by 2.1 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 801.20/GBX 379.74.

On the valuation front, the stock was trading at a trailing twelve months PE multiple of 9.5x. The company's stock beta was 0.85,reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £2.81 billion with a dividend yield of 6.54 per cent.

Growth Prospects and Risks Assessment

While the acquisition of Amec Foster Wheeler means that the company is less exposed to any cycle, and offers more stability for the company, it had to take on substantial debt to fund the acquisition and currently its leverage is 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.
 
The company has a business model that is steady and does not have many swings and helping it to report trading momentum and cost synergy delivery. The company is making a good progress on the 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.
 
Conclusion
The company is in a good position for growth trends emerging across a broad range of industries which is expected to help post a decent organic growth rate. At the same time, the order book is solid and represents 60% of forecasted 2019 revenue.
 
Based on the decent financials and supported by valuation done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 404.6 (as on 5^th June 2019) with high single-digit upside potential based on 5.76x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.) and 10.17x NTM Price/Earnings Value (approx.) on FY19E earnings per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on June-05-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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