John Wood Group PLC (LON: WG.) – Focus on achieving operational efficiency.

John Wood Group PLC is an FTSE 250 listed multinational Energy Services Company. The Company operates across four broader business segments such as Asset Solutions EAAA (Europe, Africa, Asia, Australia), Assets Solutions Americas, Technical Consulting Solutions, and Investment Services. Furthermore, it is the provider of consulting and project management solutions in the energy domain. The Group employs over 45,000 people in more than 400 offices in over 60 countries.

On 16 March 2021, WG. will announce its full-year FY20 results.

(Source: Company Presentation)

Growth Prospects and Risk Assessment

The Company has an asset-light business model focusing on strong cash generation and strengthening its position in the energy sector. During 2020, John Wood Group had witnessed a growth in renewables activity and strong revenue generation in the chemicals & downstream division. Moreover, it had raised concerns regarding volatile oil prices and uncertainty around the Covid-19 pandemic. Nevertheless, it would continue to seek opportunities to accelerate energy transition progress and achieve operational efficiencies.

(Source: Company Presentation)

Despite several operational headwinds, John Wood Group maintains strong customer relationships, which would be evident from securing new work like engineering, procurement, and construction (EPC) work for GSK, three new oil & gas scopes with Equinor and many more.

However, there are certain potential risks that can impact the business. The Company operates across multiple geographies, and its business performance can be adversely affected by currency fluctuations, oil price volatility, unfavourable trade policies. Moreover, the Company may suffer postponement of projects and reduced activity levels due to the Covid-19 pandemic.

Industry Outlook Dynamics

According to Grand View Research’s latest report, the market size of the global energy ESO (Engineering Service Outsourcing) industry is valued at USD 194.10 billion in 2019. The industry is forecasted to grow at a CAGR of 18.8% for the period from 2020 to 2027. The market growth in this industry is driven by the rising digitalization in the energy sector. However, the Covid-19 pandemic had reduced the activity levels, resulting in the delay of new energy infrastructure facilities creating equipment delivery problems.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of John Wood Group Plc.

Recent Developments

On 19 January 2021: John Wood and Spirit Energy have entered into a new agreement, which is to partner on the delivery of late-life solutions in the Morecambe Bay gas fields. This agreement is for the five-year consolidated services contract and valued at approximately USD 130 million.

A Glimpse of Business Segments

Trading Update (for the year ended 31 December 2020, as on 14 January 2021)

• In FY20, the Company delivered a resilient performance and expected revenue to be around USD 7.6 billion (on a reported basis).
• John Wood expects 2020 adjusted EBITDA to be in the range of USD 620-640 million; 2020 adjusted margin to be in between 8.2% to 8.4%. Moreover, operating profit before exceptional items will be approximately USD 215-235 million.
• The Company expects Asset Solutions Americas revenue to be down by more than 20%, compared with 2019, while adjusted EBITDA margins will be down from 2019. Still, it has benefitted from cost reduction initiatives and improved utilisation.
• In the Asset Solutions EAAA division, the revenue will decrease by around 20% (against 2019) on a like-for-like basis. However, its adjusted EBITDA will be significantly up from 2019.
• The Technical Consulting Solutions revenue will decrease by approximately 20% in FY20 (against 2019), including the nuclear business's disposal. Furthermore, the adjusted EBITDA margin is expected to be favourable (compared to 2019).
• The Company expects net debt (excluding leases) to reduce around USD 400 million at 31 December 2020 (compared with 30 June 2020).
• At the end of November 2020, the order book stood at USD 6.2 billion, with more than 60% due to being delivered in 2021.
• The Company has undrawn facilities of around USD 1.75 billion and extended the main revolving credit facility of USD 1.51 billion to May 2023.
• Looking ahead, the Company will continue to drive strong 2021 EBITDA margin delivery, maintaining the position as sector leaders in sustainability and ESG.

Financial and Operational Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 18 August 2020)

(Source: Company Website)

• In the first half of 2020, the Company reported strong earnings that were on the higher side of the guidance, and it maintained the balance sheet strength through net debt reduction.
• John Wood has a strong order book through new contract wins amid challenging market conditions.
• Operating profit and Adjusted EBITDA were benefitted from good operational utilisation and reduced overheads.
• The Company witnessed strong liquidity and significant financial headroom, with net debt of US$1.22 billion.
• Some of the new project wins include wind & solar EPC project in the US, construction work for GSK, an upstream project contract extension in the UK and efforts to increase oilfield production in Iraq.
• In H1 FY20, the Company booked new orders of USD 3.3 billion, of which USD 1.7 billion have been secured since early March 2020, and the total order book stood at USD 7.0 billion.
• The Company is well-positioned to take benefits from growth trends across the energy and industrial markets.
• Moreover, the Company has a proven track record of leveraging the flexible and asset-light model at a decent pace to protect the margins. 

Share Price Performance Analysis

On 24 February 2021, at the time of writing (before the market close, at 8:17 AM GMT), John Wood Group shares were trading at GBX 294.30, up by 1.27% against the previous day closing price. Stock 52-week High was GBX 411.30 and Low of GBX 100.90, respectively.

From the technical standpoint, 200-day SMA (249.50), 200-day EMA (279.9) and 14-day RSI (45.51) are indicating a bullish setup.

In the past six months, John Wood Group PLC’s stock price has delivered a return of +27.06% return as compared to +19.23% return of FTSE 250 index and +19.41% return of FTSE All-Share Oil Equipment Services & Distribution index, which shows that the stock has outperformed the benchmark index and the sector.

Valuation Methodology: EV/EBITDA Approach (NTM) (Illustrative)

Business Outlook Scenario

John Wood had delivered resilient business performance amid a challenging trading environment driven by flexibility. The Company had anticipated its FY20 revenue to be approximately USD 7.60 billion and EBITDA to be ranging from USD 620 million to USD 640 million. Moreover, the primary financial focus of the Group is to deliver a healthy FY21 margin and maintain the position of the market leader in ESG and sustainability.

On the liquidity front, the Company had sufficient funds of USD 1.75 billion and a revolving credit facility extended till May 2023. However, the order book at the end of November 2020 had reduced from the December 2019 levels reflecting the Company’s discerning approach towards contract tendering. Nevertheless, the Company has generated substantial operational efficiencies with a reduction in debt, and therefore, it shall continue to maintain a significant EBITDA margin and drive a medium-term growth trajectory. Overall, the Company would continue to optimize its operating model and focus on digital transformation.

(Source: Company Presentation)

Considering the robust revenue in chemicals & downstream segments, sale of the interest in TransCanada Turbines, resilient business model, decent operating and financial performance, agreement with Spirit Energy, expansion in China, a further reduction in net debt, the higher-margin business focused on energy and built environment markets, decent cash generation capabilities, and support from the valuation as done using the above method, we have given a “BUY” recommendation on John Wood Group at the current price of GBX 294.30 (as on 24 February 2021, before the market close at 8:17 AM GMT), with lower-double digit upside potential based on 7.50x EV/NTM EBITDA (approx.) on FY21E EBITDA (approx.).

 

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

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