Overview
John Wood Group PLC (WG) is an Aberdeen, Scotland-headquartered multinational energy services company which is a global leader in the delivery of project, engineering and technical services to industrial and energy markets. The company started its operations way back in 1848 and has grown to become one of the biggest companies listed on the London Stock Exchange. The company focused on engineering, drilling services, and oilfield logistics & supplies 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, with operations in more than 60 countries.

Through specialist consultancy services, project-based delivery or long-term contracts, the company provides comprehensive services to support its customers throughout the asset life cycle and seeks to serve its customers efficiently by combining its global experience, innovative ideas and solutions, and a flexible approach. The group offers a wide range of capabilities to serve a broad range of industrial markets, including general industrial sectors, nuclear, mining, clean energy, power & process, environment & infrastructure, chemicals, and upstream, midstream and downstream oil & gas.

Key Statistics


Management

With more than 40 years of experience as an executive in the oil & gas industry, Roy Franklin is the Chairman of the Board of the company since September 2019. 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

The company on 20 August 2019 announced that it had reached an agreement to sell its nuclear business for a cash consideration of £250 million (around $305 million) to a subsidiary of American engineering company Jacobs, which will allow the company to reduce its debt levels. The deal would enable the group to achieve its target leverage policy but can go ahead only after obtaining anti-trust clearance from the Competition and Markets Authority. The transaction is expected to be complemented by the second quarter of 2020.

Financial Highlights (H1 2019, in $m)

                                       
(Source: Company Filings)

Even though E&IS recorded good growth in revenue due to spending increase by the government and industrial market in the US built environment market, lower revenues in ASEAAA and STS led to a 2.6% decline in the revenue for the period to $4.8 billion from $4.9 billion in the prior year. However, gross profit rose to $554.8 million from $546.9 million in H1 2018, as cost of sales declined from $4,369.5 million in the previous year to $4,233.4 million in the current period. As the group delivered cost synergies of $30 million, coupled with higher activity and good delivery in the built environment market, stronger performance in turbine joint ventures and improved delivery and revenue mix, the group reported growth in adjusted EBITDA and operating profit before exceptional items. Adjusted EBITDA excluding the impact of IFRS 16 was up by 7.2% to $314 million, which reflected a 60-basis point improvement in adjusted EBITDA margin (excluding the impact of IFRS 16) to 6.6%, while adjusted EBITDA was $384 million, with an adjusted EBITDA margin of 8%. Driven by strong growth in EBITDA together with a reduction in depreciation and amortisation, operating profit before exceptional items (excluding impact of IFRS 16) rose by 28% to $160 million from $125 million in H1 2018, while including a positive impact from the adoption of IFRS 16, operating profit before exceptional items was $168 million. Like for like adjusted EBITDA (excluding the impact of IFRS 16) recorded a growth of 12.1% to $314 million from $280 million reported in the prior year. Profit before tax and before exceptional items rose to $91.1 million from $75.8 million reported in the previous year of same period, while the corresponding figure including exceptional item grew to $62.2 million against a loss before tax of $25.3 million in H1 FY18. Profit for the period before exceptional costs stood at $60.3 million in H1 FY19 against $57.6 million recorded in the previous year. Profit after including exceptional items stood at $13.1 million, against a loss of $51.8 million recorded in the comparative period of last year. While basic earnings per share rose to 2.1 cents from a loss per share of 7.9 cents reported in the last year (H1 FY18). In line with the progressive dividend policy, the interim dividend rose by 1% to 11.4 cents per share. Due to two cash receipts totalling $130 million which were anticipated in June but received in early July, net debt (excluding liabilities related to leases) at the end of June rose to $1.77 billion, while the ratio of net debt (excluding the impact of IFRS 16) to trailing 12 months adjusted EBITDA pre IFRS 16 was 2.5x at 30 June 2019 (H1 2018: 2.4x).

Key Performance Indicators (FY 2018)

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, declined 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, decreased 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, reduced to 5.7% from 6%, because of slower sector recovery in oil and gas and a continued competitive pricing environment. Adjusted diluted EPS (ADEPS) rose to 57.4 cents, while Dividend per ordinary share rose by 2% to 35 cents. Cash conversion, reflecting improved working capital performance, was up significantly to 102% from 69% in FY 2017. Net debt: adjusted EBITDA ratio, which measures the ability to service debt, declined during the year to 2.2x, driven by growth in adjusted EBITDA and cost synergy delivery.

Financial Ratios

 
(Source: Thomson Reuters)

In comparison to the corresponding period last year, profitability ratios in the first half of FY 2019 reported an increase, but were less than the industry median, suggesting that the ratios are gradually closing the gap. Liquidity ratios remained largely flat while the leverage ratios declined but were lower than the industry median. The asset turnover ratio of the group was the same as its peers, indicating optimal utilisation of resources.

Valuation Methodology
Method 1: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 -16.43), Petrofac Ltd(NTM Price/Earnings was 6.57), Aker Solutions ASA(NTM Price/Earnings was 14.28),Saipem SpA(NTM Price/Earnings was 20.06), and Subsea 7 SA(NTM Price/Earnings was 27.82). The mean of Price/Earnings (NTM) of the company’s peers was 10.46x (approx.).

Method 2: EV/SalesMultiple Approach (NTM)



To compare WG with its peers, EV/Sales multiple has been used. The peers are Tecnicas Reunidas SA(NTM EV/Sales was 0.24),Petrofac Ltd(NTM EV/Sales was 0.46),Lamprell Plc(NTM EV/Sales was 0.53), TechnipFMC PLC(NTM EV/Sales was 0.67), and Subsea 7 SA(NTM EV/Sales was 0.83). The median of EV/Sales (NTM) of the company’s peers was 0.53x (approx.).

Share Price Commentary


Daily Chart as at 25-September-19, before the market closed (Source: Thomson Reuters)

On 25 September 2019, at the time of writing (before the market closed, at 10:30 am GMT), WG shares were trading at GBX 392.2, down by 3.1 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 801.20/GBX 352.70. The company's stock beta was 1.23, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £2.76 billion with a dividend yield of 6.83 per cent.

Growth Prospects and Risks Assessment

The acquisition of Amec Foster Wheeler has exposed the company to 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. To repay debt as well as to grow profitability, it would be critical to generate enough cash flows and ensure revenue synergies and organic growth. The share price of the group is susceptible to volatility in the oil prices, and the recent geopolitical events indicate that the company might experience short-term disruptions.

However, the company is less exposed to any cycle due to the acquisition of Amec Foster Wheeler, which offers more stability to the group. The sale of the nuclear business would help the company to deleverage and is expected to see a 1.5x leverage target achieved in 2020. 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 group is confident of delivering revenue growth in the region of 5% in 2019, as 87% of 2019 forecasted revenues are delivered or secured, helped by around $4.3 billion of order book to be delivered in 2019. The company continues to expect strong full-year cash conversion after exceptional items of about 80-85% and growth in full-year adjusted EBITDA is expected to be in line with market expectations of 8%. The Full-year outlook was kept unchanged by the management.

Conclusion

Maintenance of progressive dividend policy and debt reduction continues to be the preferred mode of cash usage, and 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. In the last five years, revenue has risen by a CAGR of 12.5%, while gross profit grew by a CAGR of 5.2%. Moreover, net income has also reported a profit, after a loss was recorded last year. The fundamentals of the group remain strong, indicating that the stock can give decent returns in the long run.

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 392.20 (as on 25 September 2019, before the market close) with single digit upside potential based on 0.53x NTM EV/Sales (approx.) on FY19E Sales and 10.46x NTM Price/Earnings Value (approx.) on FY19E earnings per share (approx.).

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