Business 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 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. The company operates in over 60 countries globally, having more than 400 offices and an employee base of more than 60,000 professionals. The company’s capabilities include Capital Projects, Operations solutions, Environment and infrastructure solutions, clean energy solutions, mining and minerals solutions, digital and technology, Subsea and export systems, Automation and control, and consulting. The key regions for the company are North America, Africa, Latin America, Middle East, Caspian, Asia-Pacific and Europe.

The current Chair is Roy Franklin, who was appointed in September 2019. Robin Watson holds the responsibilities of the Chief Executive Officer. David Kemp holds the responsibilities of Chief Financial officer and joined the group in 2013.

 


Top Shareholders

 
Trading Update (released on 7^th November 2019)

On 7th November 2019, John Wood Group Plc announced its trading update for FY2019. Although operations are impacted by the slow macro environment, the company’s EBITDA remained in line with expectations. The cost reduction measures resulted in improved financial performance. The formation of TCS has accelerated synergy delivery. The company’s cash flow remained the same as excepted. The company would be selling its nuclear business for $305 million and is expected to be done by Q1 FY2020. The company’s AS EAAA (Asset Solutions EAAA) is performing well in the Asia Pacific, Caspian and the Middle East.

Business Segments

The company divided its operations into 5 reportable segments being 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. In the first half of the financial year 2019, the revenue from Assets Solutions Americas (AS Americas), Environment and Infrastructure Solutions (E&IS) businesses have increased whereas, the revenue from Asset Solutions Europe, Africa, Asia, Australia (Asset Solutions EAAA), Specialist Technical Solutions (STS) and Investment Services businesses have declined. In the first half of the financial year 2019, the adjusted EBITDA and the adjusted EBITA from Asset Solutions Europe, Africa, Asia, Australia (Asset Solutions EAAA), Assets Solutions Americas (AS Americas), Specialist Technical Solutions (STS), and Environment and Infrastructure Solutions (E&IS) businesses have increased whereas, the adjusted EBITDA and the adjusted EBITA from Investment Services business declined. The operating profit from Asset Solutions Europe, Africa, Asia, Australia (Asset Solutions EAAA), Assets Solutions Americas (AS Americas), Specialist Technical Solutions (STS), Environment and Infrastructure Solutions (E&IS) and Investment Services businesses have increased.

The company also disclosed its revenue based on the geographical segments, which include the US, Europe and the Rest of the World. The company’s revenue from the US market has increased in the first half of the financial year 2019 whereas, the revenue from the European market and the rest of the world have declined for the period.

Financial Highlights – H1 Financial Year 2019 (30 June 2019, US$, million)


(Source: Interim Report, Company Website)

In the first half of the financial year 2019, due to the lower revenues in ASEAAA (Asset Solutions Europe, Africa, Asia, Australia) and STS (Specialist Technical Solutions) led to a 2.6 per cent decline in the revenue for the period to $4.8 billion from $4.9 billion in the prior year. Adjusted EBITDA excluding the impact of IFRS 16 was up by 7.2 per cent to $314 million in the first half of the financial year 2019 versus $293 million in the first half of the financial year 2018, which reflected a 60-basis point improvement in adjusted EBITDA margin (excluding the impact of IFRS 16) to 6.6 per cent in H1 FY2019 from 6 per cent in H1 FY2018.The company’soperating income (before exceptional items and excluding IFRS 16 impact) stood at $160 million in the first half of the financial year 2019 versus an operating income (before exceptional items and excluding IFRS 16 impact) of $125 million in the first half of the financial year 2018, reflecting an increase of 28 per cent for the period. The adjusted EBITDA was $384 million in the first half of the financial year 2019 versus an adjusted EBITDA of $293 million in the first half of the financial year 2018, with an adjusted EBITDA margin of 8 per cent in H1 FY2019 versus 6 per cent in H1 FY2018. The company’soperating income (before exceptional items) stood at $168 million in the first half of the financial year 2019 versus an operating income (before exceptional items)of $125 million in the first half of the financial year 2018. The company’soperating income surged by 479.2 per cent from $24 million in H1 FY2018to $139 million in H1 FY2019. The Profit for the period stood at $13 million in H1 FY2019 versus a loss for the period of $52 million in H1 FY2018. While basic earnings per share rose to 2.1 cents from a loss per share of 7.9 cents reported in H1 FY2018. In line with the progressive dividend policy, the interim dividend rose by 0.9 per cent to 11.4 cents per share. 

Key Performance Indicators
 

Adjusted Diluted EPS

Diluted EPS is used to check the quality of EPS (earnings per share) of the company if all convertible securities are exercised. John Wood Group Plc’s adjusted diluted earnings per share surged to 57.4 cents in FY2018 versus adjusted diluted earnings per share of 53.3 cents in FY2017.


Dividend per Ordinary Share

DPS (Dividend per share) reflects the total announced dividends delivered for every share outstanding by the company. John Wood Group Plc’s DPS surged by 2 per cent to 35 cents in the financial year 2018 from 34.3 cents in FY2017.


Cash Conversion

Cash Conversion ratio is a financial management tool used to identify the ratio of cash flows. In the financial year 2018, the company’s cash conversion showed a significant increase to 102 per cent from 69 per cent in the FY2017.


Net Debt/ adjusted EBITDA Ratio

Net Debt/ adjusted EBITDA Ratio is used to measure the company’s ability to service its debt. With continuous growth in adjusted EBITDA, cost synergy delivery, proceeds from non-core asset disposals, maintaining capital discipline and improved working capital performance, the company’s net debt to adjusted EBITDA ratio reduced to 2.2x in FY2018 from 2.4x in FY2017. The company targets to achieve net debt to adjusted EBITDA ratio of 1.5x.


Total recordable case frequency (TRCF)

John Wood Group is aiming to deliver high standards of safety and healthcare for its employees. TRCF (Total recordable case frequency) calculation is based on the medical treatment cases, restricted work cases and a total of lost work cases, per 200,000-man hours. The company has achieved a 28 per cent reduction in its TRCF for the period.

Financial Ratios 
 
 

The reported gross margin in H1 FY2019 surged by 0.5 per cent to 11.6 per cent in the first half of the financial year 2019 versus 11.1 per cent in H1 FY2018and stood lower as compared to the industry median. The reported EBITDA margin of 7.3 per cent for the H1 FY2019 stood lower than the industry median of 10.4 per cent. The reported operating margin in H1 FY2019 was up by 2.4 per cent to 2.9 per cent from 0.5 per cent reported last year for the same period. The reported Pretax margin of 1.3 per cent for the H1 FY2019 remained the same as the industry median of 1.3 per cent. Net margin reported was 0.3 per cent for the first half of the financial year 2019, reflecting an increase of 1.4 per cent when comparedwith last year data for the same period. Return on equity for the Financial year 2019 stood at 0.3 per cent, which was slightly lower than the industry median of 0.4 per cent. On the liquidity front, John Wood GroupPlc’scurrent ratio was lower than the industry median of 1.35, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the John Wood GroupPlc’swas 0.82x, which was lower as compared to the industry median of 0.97x, reflecting that the company is less leveraged as compared to its peers.

Share Price Performance

Daily Chart as at November-20-19, before the market close (Source: Thomson Reuters)

On November 20, 2019, at the time of writing (before the market close, at 10:27 AM GMT), John Wood GroupPlc shares were trading at GBX 342.50, down by 2.50 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 685.40/GBX 322.50. At the time of writing, the share was trading 50.03 per cent lower than the 52w High and 6.20 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 2,373,710.00; 30 days – 3,134,700.17 and 90 days – 3,152,032.24. The average traded volume for 5 days was down by 24.28 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.28, reflecting higher volatility as compared to the benchmark index. The outstanding market capitalisation was around £2.41 billion, with a dividend yield of 7.88 per cent.

Valuation Methodology
Method 1: Price to Cash Flow Approach (NTM)

To compare John Wood Group Plc with its peers, Price/Cash Flow multiple has been used. The peers are Weir Group Plc(NTM Price/Cash Flow was 10.83), Lamprell Plc(NTM Price/Cash Flow was 9.81), TechnipFMC Plc(NTM Price/Cash Flow was 9.44), Hunting Plc(NTM Price/Cash Flow was 7.69) and Bourbon Corporation SA(NTM Price/Cash Flow was 7.65). The Average of Price/Cash Flow (NTM) of the company’s peers was 9.08x (approx.)
 
Method 2: Price to Earnings Approach (NTM)

 
To compare John Wood Group Plc withits peers, Price/Earnings multiple has been used. The peers are Petrofac Ltd(NTM Price/Earnings was 6.59), Premier Oil Plc(NTM Price/Earnings was 7.41), EnQuest Plc(NTM Price/Earnings was 2.59), Dof ASA(NTM Price/Earnings was 1.02) and Solstad offshore ASA(NTM Price/Earnings was 0.70). The Average of Price/Earnings (NTM) of the company’s peers was 3.70x (approx.)
 
Growth and Risk Assessments

The company has many value-accretive projects in the pipeline with low risk and higher production. The company is well-positioned to take benefits from growth trends across the energy and industrial markets. The company using its cost synergies, has optimized its operational structure to achieve sustainable growth in the future. The company operates inmultiple geographies due to which its profits can be impacted negatively due to foreign exchange rate fluctuations. The ongoing trade war between the US and China has impacted the company’s performance.

Conclusion

The company is making a 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 and 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%.

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from USD 6,574 million in FY14 to USD 10,014 million in FY18. Compounded annual growth rate (CAGR) stood at 11.09 per cent.
Based on the decent growth prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 340.09 (as on 20^th November 2019, before the market close at 8:40 AM GMT), with lower-double digit upside potential, based on 9.08x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 3.70x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.77438 GBP.

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