John Wood Group Plc – Operating with a Sustainable Business Model and Strong Balance Sheet 

John Wood Group Plc (LON: WG.) is a multinational energy services Company based out of Aberdeen, Scotland. It delivers technical, engineering and project services to energy and industrial markets. The Group's operations are differentiated in four operating segments: Assets Solutions Americas (AS Americas), Asset Solutions Europe, Africa, Asia, Australia (Asset Solutions EAAA), Technical Consulting Solutions and Investment Services. The Company operates in over 60 countries globally, having more than 400 offices and an employee base of more than 55,000 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 customers from various sectors which include, Oil & Gas, Infrastructure, Government, Power, Mining and Industrial & manufacturing.

On 18 August 2020, the Company will announce the half-year results for the six months ended 30 June 2020.
 

(Source: Company Presentation)

Key Fundamental Statistics

 
 

Growth Catalysts and Risk Assessments

In the recent trading update, the Group stated favourable results were observed in downstream & chemicals and renewables divisions. In April and May, the Group booked new orders of USD 1.3 billion. Revenues in the ASA division have remained relatively robust in the first quarter of 2020. In AS EAAA division, the Group witnessed robust activity levels on capital projects work in H1 FY20. In 2019, the Group delivered earnings growth, margin improvement and strong cash generation, which resulted in a reduction in the net debt. The Company has many value-accretive projects in the pipeline with low risk and higher production capabilities. The Company is well-positioned to take benefits from growth trends across the energy and industrial markets. The Group using the cost synergies had optimized the operational structure to achieve sustainable growth in the future. Moreover, the Group has a proven track record of leveraging the flexible and asset-light model at a decent pace to protect the margins. The Company has a strong order book for the next twelve months and beyond that also.


(Source: Company Website)

However, the performance of the Company is exposed to certain risks and uncertainties, such as interruption in production due to Covid-19 outbreak, which could hamper the supply chain; change in the regulations regarding environmental safety; impact on reputation due to the operational accidents, injuries; weakness in the contract bidding process and misalignment of contract terms; inappropriate pricing and failure to comply with the contractual conditions; geopolitical uncertainties hampering the ability to obtain licenses, and loss of business opportunity due to liquidity risk.

Global political uncertainty regarding trade policy also poses a risk for the Group, including protectionist measures and regulation or legislation in local markets. The Company is cautious about the outlook for key commodities in the short term but expects positive demand in the long-term. The Company operates in multiple geographies, and profits can be impacted negatively due to the foreign exchange rate fluctuations. Failure to ensure compliance  with EU GDPR (General Data Protection Regulation) and any other data protection regulations could also impact the operational and financial performance. 

Business Strategy

The Group’s strategy is focused on delivering margin improvements for a medium-term through portfolio optimisation and executive excellence.


(Source: Company Presentation)
 
Segment Analysis

The Company creates value for customers during the asset life cycle in energy by delivering solutions related to operations, projects and consulting. The Group classified its business into Operating segments and Geographic segments. The operations are divided into five operating segments being Asset Solutions EAAA, Asset Solutions Americas, Technical Consulting Solutions, Investment Services.

The revenue and profitability highlights of the operating segments can be seen in the image below:


(Source: Annual Report, Company Website)
 
The Company also divides its business into geographic segments, which represents the areas in which it operates. The Group operates in eight geographic segments being, the UK, the USA, Canada, Australia, Kuwait, Kazakhstan, Saudi Arabia and ROW (Rest of the World).

The revenue and non-current assets highlights of the geographic segments can be seen in the image below:


(Source: Annual Report, Company Website)

The Group operates in Assets Solutions Americas (ASA, approximately  40% of H1 FY20 Revenue), Asset Solutions Europe, Africa, Asia, Australia (AS EAAA, around 30% of H1 FY20 Revenue), and Technical Consulting Solutions (TCS, around 30% of H1 FY20 Revenue). The formation of TCS brought together the capabilities of STS (Specialist Technical Solutions) and E&IS (Environment and Infrastructure Solutions).

In ASA, the revenues have stayed relatively robust in the first half of 2020, a decrease of approximately 8% from the corresponding period of the last year (H1 FY19). Adjusted EBITDA margins for ASA division will be down on H1 2019, due to the lower activity and cost overruns of approximately US$30 million on the legacy energy projects from 2019. In AS EAAA division, the adjusted EBITDA margins for the first half of 2020 are in line with the first half of 2019, reflecting the benefits of effective action on utilisation and cost management in response to lower activity. On a  like-for-like basis, the revenue for H1 FY20 was down by approximately 15% in TCS division (compared with the same period last year). Also, the adjusted EBITDA margins are up on H1 FY19 benefitting from the synergy delivery initiatives (which started in Q4 2019) and the strategic margin focus.

Synopsis of Recent Developments

On 16 June 2020, John Wood Group announced that it had secured two solar EPC (engineering, procurement and construction) contracts from a US-based energy and power company with the worth of more than $200 million.

Key Performance Indicators


(Source: Annual Report, Company Website)

In terms of safety measures, the Group managed to maintain TRCF (Total recordable case frequency) and LWCF (Lost work case frequency) to minimum levels and in line with FY2019 data.

The adjusted EBITDA margin shows the Company’s ability to convert revenue into profits. In the financial year 2019, the adjusted EBITDA margin increased to 8.6% as compared with 6.9% in FY2018. The adjusted diluted earnings per share have slightly declined due to an increase in finance cost and software amortisation but stood in line with FY2019 data.

Top Shareholders Statistics

 
 

Pre-Close Trading Update (for the six months ended 30 June 2020, as on 19 June 2020)

The Group provided the pre-closing trading update for the six months ended 30 June 2020, with fall in revenue (driven by Covid-19 mayhem and decrease in the oil prices), but it has secured US$1.3 billion of new orders in April 2020 and May 2020.  As per the pre-closing trading update, the like-for-like revenue will be down by approximately 11% and adjusted EBITDA will be down by around 19% in the first half of 2020. First-half revenue included a rise in renewables activity and relatively healthy activities in the downstream & chemicals and built environment markets. In the second quarter of 2020, the revenue is expected to be US$2 billion. On a reported basis, revenue will be around US$4.1 billion, adjusted EBITDA will be approximately US$295m to US$305 million and operating profit before exceptional items will be in the range of US$80 million to US$90 million. The renewables activity increased by 4% and upstream & midstream activity reduced by 5% in H1 FY20.

The financing facilities were above US$3 billion (include bilateral term loans of US$300 million), US private placement debt of approximately US$880 million, and a revolving credit facility of US$1.75 billion. The bilateral and revolving credit facilities have a maturity date of May 2022. The US private placement debt has a variety of maturity dates between 2021 and 2031, with US$77 million of the first maturity in late 2021 and the majority weighted to the later dates. The Group delivered a strong balance sheet and liquidity position, with net debt at 30 June 2020 is expected to reduce from US$1.42 billion in December 2019.

Financial Highlights - Surge in Operating Profit with Decent Revenue Stream (31 December 2019)


(Source: Company Website)

In the financial year 2019, the revenue stood at US$9.9 billion, a decrease of 1.2% from the previous year (2018: US$10.0 billion). The revenue reflects a generally robust activity across the energy and built environment markets. Led by performance in AS EAAA & E&IS, the Group’s adjusted EBITDA increased by 5.4% to US$855 million (2018: US$694 million). While the operating profit before exceptional items was US$411 million and was in line with guidance and expectations. Profit for the financial year 2019 stood at US$73 million (2018: loss of US$8 million), benefitting from a significant reduction in exceptional items (net of tax) from US$183 million to US$127 million. Although slightly lower than 2018, the cash conversion was strong in 2019 at 96% driven by a working capital inflow, which reflects the continued focus on working capital initiatives, the benefit of advance payments relating to ASA and a reduction in exceptional costs. Order book at 31 December 2019 stood at US$7.9 billion (December 2018: US$8.5 billion).

Financial Ratios – Improved Profitability in FY2019 versus FY2018

    
(Source: Refinitiv, Thomson Reuters)

In the financial year 2019, reported profitability metrics stood higher against the last year data. The Group managed to show decent profitability and reflected better control over expenses. John Wood Group Plc has delivered positive shareholders’ return of 1.6% in FY2019 against negative return as reported last year, and it was in line with the industry median of 1.6%. On the liquidity front, John Wood Group Plc’s current ratio was lower than the industry median of 1.27,but the Group has sufficient current assets to pay short-term obligations. On leverage front, the debt-equity ratio was 0.88x, which was marginally higher as compared to the industry median.

Share Price Performance Analysis


Daily Chart as on 29 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On July 29, 2020, at the time of writing (before the market close, at 10:05 AM GMT+1), John Wood Group Plc shares were trading at GBX 199.90, down by 3.52% against the previous day closing price. Stock 52 week High and Low were GBX 557.30 and GBX 100.90, respectively.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology

Price/Earnings Approach (NTM)

To compare John Wood Group Plc with peers, Price/Earnings multiple has been used. The peers are Weir Group Plc (Price/NTM Earnings was 20.52), TechnipFMC Plc (Price/NTM Earnings was 19.08), Petrofac Ltd (Price/NTM Earnings was 8.77) and ADES International Holding Plc (Price/NTM Earnings was 5.19). The Average of Price/NTM Earnings of the company’s peers was 13.39x (approx.).

Business Outlook Scenario

Despite the Covid-19 crisis, the Group continued to work and win new contracts, supported by secured new orders in April and May. Moreover, the Group has a proven track record of leveraging the flexible and asset-light model at a quick pace to protect the margin. In Q2 FY20, WG had completed the actions required to deliver overhead cost savings of more than US$200 million in FY 2020. However, the risk of further delays and postponements persists in 2020.  Meanwhile, the Company is prepared for a broader range of outcomes depending on activity across the broad end markets. In the financial year 2020, the Group remains focused on protecting the margin, which gives confidence in delivering significantly stronger margins in H2 FY20.

In the first half of 2020 (on a reported basis), the revenue will be around US$4.1 billion, adjusted EBITDA will be approximately US$295m to US$305 million and operating profit before exceptional items will be in the range of US$80 million to US$90 million. Furthermore, the relative strength was witnessed in the chemicals & downstream, the built environment and renewables space. The Company also has a secured framework agreement for five years with the US Navy for design, engineering, and maintenance of fuel installation. Overall, the Group seems to be well-positioned to deliver a strong performance in the long run. Moreover, the recent disposal of nuclear and industrial service businesses have generated an additional liquidity of around $399 million.

John Wood Group Plc witnessed a CAGR growth of ~18.59% in revenue over the period of FY15-FY19.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation at the current price of GBX 199.90 (as on 29 July 2020, before the market close at 10:05 AM GMT+1), with lower double-digit upside potential based on 13.39x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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