Business Overview
John Wood Group Plc (LON: WG.) is a multinational energy services company based out of Aberdeen, Scotland, delivering technical, engineering and project services to energy and industrial 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 company caters to the needs of its customers from various sectors which include, Oil & Gas, Infrastructure, Government, Power, Mining and Industrial & manufacturing.

The current Chair is Roy Franklin and 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.

Sector Insights

Oil Equipment, Services & Distribution sector includes the companies offering Oil and Gas Drilling services on a contract basis or holders of the drilling rigs which are contracted for their services for wells drilling. Such companies also provide equipment required for the manufacturing of Oil and Gas and services which involve activities related to locating energy sources, drilling and formation evaluation, well construction and production & completion services. The movement of oil and natural gas prices is determined by the energy demand, which is affected by economic development, general business conditions and global population growth. The OPEC (Organization of Petroleum Exporting Countries) has the ability to maintain the production level of oil.

Key Statistics

 

Top Shareholders 
 
 

Recent News

On 16th January 2020, John Wood Group Plc announced the selection of Birgitte Brinch Madsen. Ms Madsen will join the group as Director Non-Executive effective from 1st March 2020. She will also be part of the Safety, Assurance and Business Ethics Committee and Nomination Committee.

Trading Update

On 16^th January 2020,John Wood Group released an update for trading period ending 31^st December 2019. The company witnessed growth in the earnings, improvement in the margin with strong cash generation and reduction in net debt for the period. In the fourth quarter of the financial year, the company stated the formation of Technical Consulting Solutions businessand focused on project management with a higher margin.The company’s adjusted EBITDA is expected to be in-between USD 850 million to USD 860 million, and operating profit (before exceptional) is expected to range from USD 410 million to USD 420 million for the period. The adjusted EBITDA and operating profit (before exceptional) are in line with market expectations. The company expects its adjusted EBITDA(pre-IFRS 16)to be up by approximately 6 per cent on Like for likebasis. The operating profit (before exceptional) (pre-IFRS 16)showed an approximate increase of 20 per cent for the period, which includes cost synergy deliveryof around USD 60 million. The company delivered revenue of around USD 10 billion for the period, reflecting robust activity. The company witnessed an increase in the cash generation in the second half of the financial year 2019 which resulted in a decline in net debt to be below USD 1.5 billion. In Q1 FY2020, the company will dispose of its nuclear business for around USD 325million. In the financial year 2020, the company expected modest growth in revenue and improvement in the margins, which will result in an adjusted EBITDAgrowth.

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. 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) is the total announced dividend 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’s target is 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) is calculated based on 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 of  January 22^nd, 2020, before the market close (Source: Thomson Reuters)

John Wood Group Plc shares were trading at GBX 391.60 at the time of writing before the market close (at 10:07 AM GMT) on 22^nd January 2020 and were up by 0.08% versus the previous day closing price. Stock's 52 weeks High and Low are GBX 598.60/GBX 314.00. Stock’s average traded volume for 5 days was 2,294,756.40; 30 days – 2,708,927.50 and 90 days – 3,943,143.99. The traded (average) volume for five days was down by 15.29 per cent versus 30 days traded (average) volume. The outstanding market capitalisation was around £2.67 billion, with a dividend yield of 6.85 per cent.

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

 


To compare John Wood GroupPlc withits peers, Price/Cash Flow multiple has been used. The peers are Lamprell Plc(NTM Price/Cash Flow was 15.05), TechnipFMC Plc(NTM Price/Cash Flow was 10.94), Weir Group Plc(NTM Price/Cash Flow was 10.54), Hunting Plc(NTM Price/Cash Flow was 7.42) and Pharos Energy Plc(NTM Price/Cash Flow was 8.28). The Average of Price/Cash Flow (NTM) of the company’s peers was 10.45x (approx.)

Method 2: Price to Earnings Approach (NTM)



To compare John Wood GroupPlc withits peers, Price/Earnings multiple has been used. The peers are Petrofac Ltd(NTM Price/Earnings was 7.13), Premier Oil Plc(NTM Price/Earnings was 13.65), TechnipFMC Plc(NTM Price/Earnings was 13.31), BP Plc(NTM Price/Earnings was 11.71) and Hunting Plc(NTM Price/Earnings was 11.25). The Average of Price/Earnings (NTM) of the company’s peers was 11.41x 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, had optimized its operational structure to achieve sustainable growth in the future. The company operates inmultiple geographies, its profits can be impacted negatively due to foreign exchange rate fluctuations. The ongoing trade war between the US and China had impacted the company’s performance.

Conclusion

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 and helped by around $4.3 billion of the 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 decent 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 385.50 (as on 22^nd January 2020, before the market close at 8:00 AM GMT) with single-digit upside potential based on 10.45x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 11.41x 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 = 0.7657 GBP.

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