Investment Summary
 

1. John Wood Group is one of the global market leaders in providing project, engineering and technical services in energy, industrial and environment related sectors.

2. It provides performance driven solutions across the asset life cycle from scratch across various industrial markets.

3. The Group designs and deploys leading-edge technology that creates efficient and sustainable solutions for its customers.

4. Its broad end market exposure means it is less exposed to volatility in individual markets.

5. The company has a good financial position which would create value for its shareholders in the long term.
 

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 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.

Key Statistics



Top Shareholders


Source: Thomson Reuters

Company’s Business

John Wood Group is one of the world’s leading engineering and consultancy companies, operating in the energy and built environment markets.


(Source: Preliminary Presentation, Company Website)

Strategic Objectives


(Source: Preliminary Presentation, Company Website)


The company strategic objectives are divided into three parts:
 

1. Future: This segment deals with the Group’s objective of positioning itself for emerging trends in Energy and Environment markets.

2. Ready: This objective is associated with the operational model design, which can tap on the growth opportunities.

3. Now: Its objective is to deliver higher margin sustainable business.
 

Investment Propositions

(Source: Preliminary Presentation, Company Website)

Robust Order Book


(Source: Preliminary Presentation, Company Website)

The company has a strong order book for the next twelve months and beyond twelve months also.

Decent Guidance - 2020
 

1. The company expected decent growth in its underlying revenue and EBITDA based on the existing forecasts and order book.

2. The Group reported no direct impact from Covid-19 till date.

3. The company has an asset light model which provides sustainability in changing market conditions and focuses on margin improvements.

4. The Group expected 35% upstream/midstream oil & gas breadth in Energy and Built Environment markets.
 

Recent News

On 9^th March 2020, the company announced that it had sold its nuclear business to Jacobs. The total cash consideration for the nuclear business was GBP 250 million (around $325 million).

Surge in Operating Profit with continued Decent Revenue Stream - FY2019


(Source: Preliminary Report, Company Website)

For the financial year ending 31st December 2019, the group’s order book declined by 7.3 per cent to USD 7,898 million as against USD 8,524 million in FY2018, which resulted in the decline of revenue by 1.2 per cent to USD 9,890 million in FY2019 from USD 10,014 million in FY2018. The adjusted EBITDA stood at USD 855 million in the financial year 2019 versus an adjusted EBITDA of USD 694 million in FY2018, while the adjusted EBITDA margin stood at 8.6 per cent for the period. The operating profit (before exceptional items) increased by 15.1 per cent from USD 357 million in FY2018 to USD 411 million in FY2019. The group’s operating profit went up by 83.6 per cent to USD 303 million in FY2019 from USD 165 million in FY2018. The Profit for the period stood at USD 73 million in FY2019 versus a loss for the period of USD 8 million in FY2018. The basic earnings per share stood at 10.7 cents in FY2019 versus a loss per share of 1.3 cents in FY2018. The company’s total dividend increased by 0.9 per cent to 35.3 cents in FY2019 from 35 cents in FY2018.

Key Performing Indicators

Adjusted diluted EPS


(Source: Preliminary Presentation, Company Website)

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


(Source: Preliminary Presentation, Company Website)

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


(Source: Preliminary Presentation, Company Website)

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 to adjusted EBITDA ratio


(Source: Preliminary Presentation, Company Website)

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.

TRCF


(Source: Preliminary Presentation, Company Website)

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 EBITDA margin in FY19 was 7.70 per cent against the industry median of 21.10%. The reported operating margin was 3.10 per cent for the FY19. Net margin reported was 0.7 per cent for the fiscal year 2019, higher from the industry median of 0.6%. Return on equity for the same period stood at 1.60 per cent. On the liquidity front, John Wood Group Group Plc’s current ratio stood at 0.95x. On leverage front, the debt-equity ratio of the John Wood Group Plc’s was 0.88 i.e. the company is more leveraged than the industry with debt-equity ratio of 0.69.

Share Price Performance


Daily Chart as on 1^stApril 2020, before the market closed (Source: Thomson Reuters)

On April 1, 2020, at the time of writing (before the market close, at 10:20 AM GMT), John Wood Group Plc shares were trading at GBX 146.60, down by 5.81 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 560.80/GBX 100.90. The group’s stock is reflecting higher volatility as against the benchmark index based on the company’s beta of 1.8768. The outstanding market capitalization was around £1.07 billion.
From the technical standpoint, 14 days-Relative Strength Index of the stock is strengthening the upside move and currently hovering near oversold zone.

Valuation Methodology

Method 1: Price to Earnings Approach (NTM)



To compare John Wood Group Plc with its peers, Price/Earnings multiple has been used. The peers are Petrofac Ltd (NTM Price/Earnings was 3.5), Tullow Oil Plc (NTM Price/Earnings was 4.13), Fugro NV (NTM Price/Earnings was 4.42) and Weir Group Plc (NTM Price/Earnings was 8.62). The average of Price/Earnings (NTM) of the company’s peers was 5.17x (approx.)

Method 2: 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 Petrofac Ltd (NTM Price/Cash Flow was 3), Tullow Oil Plc (NTM Price/Cash Flow was 0.35) and Weir Group Plc (NTM Price/Cash Flow was 6.76). The average of Price/Cash Flow (NTM) of the company’s peers was 3.37x (approx.)

Valuation Metrics


(Source: LSE)

As on 28^th February 2020, the company’s P/B multiple is 0.7x, which was lower as compared with the industry, which shows that the company is underpriced than the industry.
 
 

(Source: LSE)

As on 28^th February 2020, the company’s Price/Sales multiple is 0.3x, which was in line with the industry.


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

Dividend Yield


(Source: Thomson Reuters)

John Wood Group Plc has a dividend yield of 17.53 per cent, which is higher than the industry dividend yield of 10.33 per cent and the sector dividend yield of 13.91 per cent.

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 in multiple geographies. Its profits can be impacted negatively due to foreign exchange rate fluctuations. The ongoing outbreak of Coronavirus could impact the company’s performance in the near term.

Conclusion

The company is making good progress on non-core asset disposal program, 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 decent revenue growth in the long term. The Group expected modest revenue growth and growth in underlying EBITDA based on the existing forecasts and order book. The company is also focused on improving its margins. The Group has a proven track record of leveraging its flexible, asset light model which could sail through challenging market conditions and the company had diversified end markets.

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 138.30 (as on 1^st April 2020, before the market close at 8:39 AM GMT) with lower double-digit upside potential based on 3.37x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.) and 5.17x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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