John Wood Group PLC (LON: WG.) – Sustainable business model and a robust balance sheet position

John Wood Group PLC is a global leader in consulting, projects & operations solutions in energy and the built environment. The Group operates through four divisions, namely, ASEAAA (Asset Solutions Europe, Africa, Asia, Australia), ASA (Asset Solutions Americas), TCS (“Technical Consulting Solutions”), and Investment Services. The Group employs over 45,000 people in more than 400 offices in over 60 countries. It is a constituent of the FTSE 250 index.

On 13 May 2021, the Company will have its Annual General Meeting.

  

(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. WG. had managed to show a growth in renewables activity and strengthen the built environment despite various operational headwinds caused by the oil price volatility and the Covid-19 pandemic during 2020. John Wood Group had also anticipated progression in order book due to expectations of strength in the built environment and robustness in renewables segment.

 

(Source: Company presentation)

John Wood Group maintains strong customer relationships, which would be evident from securing new work like engineering, procurement, and construction (EPC) work for several clients.

However, the performance can be significantly impacted by several risk factors. The Company had a significant risk of bribery and corruption as it just reached a settlement with Scottish authorities on the Unaoil investigation. John Wood Group would also keep monitoring Brexit risk in 2021. The weaknesses in the contract bidding and award process may impact several numbers of new orders. The failure in executing projects within the stipulated time and proper budget may impact the business. 

After understanding growth prospects and risk assessments, we will analyse some key fundamental and shareholders statistics of John Wood Group PLC.

Recent Developments

On 23 March 2021: The Company updated that it had completed the sale of its interest in Sulzer Wood Ltd to Sulzer for the total consideration of USD 17.5 million.

On 16 March 2021: WG. announced that it had reached a civil settlement with Scotland's Civil Recovery Unit in relation to the historical engagement of Unaoil.

Financial and Operational Highlights for the twelve months ended 31 December 2020 (as on 16 March 2021)

(Source: Company result)

• WG. had reported a decline of 23.5% in revenue to around USD 7.6 billion during FY20 due to the substantial reduction in conventional energy activity.
• On the profitability front, the Group had delivered a decent adjusted EBITDA margin of 8.30% during FY20, illustrating strong operational delivery in ASEAAA and TCS.
• Moreover, the adjusted EBITDA of USD 630 million and operating profit before exceptionals of USD 214 million during FY20 remained in line with the expectations.
• With regards to the financial position, WG. had reported a significant reduction in net debt excluding leases from USD 1.42 billion as of 31 December 2019 to USD 1.01 billion as of 31 December 2020.
• Meanwhile, the Company had shown a reduction of 17.4% in the order book as it remained around USD 6.52 billion as of 31 December 2020.

Financial Ratios (FY20)

Share Price Performance Analysis

 (Source: Refinitiv, Thomson Reuters)

On 14 April 2021, at 10:09 AM GMT, WG. shares were trading at GBX 269.50, down by 0.41% against the previous day closing price. Stock 52-week High and Low were GBX 367.20 and GBX 155.00, respectively.

From a technical standpoint, 200-day SMA (GBX 263.10) supports the upside potential. John Wood Group prices were in a correction phase for the past three months. However, prices are getting support from an upward sloping trend line, indicating a possibility of upside movement in the stock. The momentum indicator 14-day RSI was trading at ~39 levels and reversed from the oversold zone, further indicating an upside direction from the current level.

In the last one year, WG.’s stock price has delivered a positive return of ~34.00%; and it has outperformed the FTSE All-Share Oil & Gas index with a return of negative 5.19%.

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

Business Outlook Scenario

John Wood Group had achieved robust financial performance during FY20, benefitted by strategic positioning across broad end markets and a sound business model. However, 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. On the liquidity front, the Company had sufficient funds of USD 1.74 billion and a revolving credit facility extended till May 2023.

Moreover, the order book at the end of FY20 reflects 67% of projects to be delivered during 2021. The Company had witnessed positive momentum in new orders during late Q4 FY20 as December orders remained 5% more than that of November 2020. The Group is focused on improvement in margin and cash flow driven by maintaining high utilisation, improved project execution and operational and efficiency improvements. 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.

(Source: Company presentation)

Considering the strength of the business model, improved margins, decent cash generation, decent financial performance, growth in renewables activity, a significant reduction in net debt, substantial progress in the order book, 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 269.50 (as on 14 April 2021 at 10:09 AM GMT), with lower-double digit upside potential based on 6.97x EV/NTM EBITDA (approx.) on FY21E EBITDA (approx.).

 

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

*The dividend yield is subject to change as per the stock price movement.

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