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

John Wood Group Plc (LON: WG.) is a FTSE 250 listed multinational energy services company based out of Aberdeen, Scotland, delivering technical, engineering and project services to energy and industrial markets.

Trading Update
On 19th June 2020,the Group provided the pre-closing trading update for the six months ended 30 June 2020, with the global engineering and consultancy market facing unparalleled and unique challenges in 2020 from Covid-19 and volatility in oil prices. However, the Group has secured USD 1.3 billion of new orders in April and May 2020. The Group delivered a strong balance sheet and liquidity position, with net debt at 30 June 2020 expected to be at lower level. As per the pre-closing trading update, the like-for-like revenue will dip by approximately 11 per cent and adjusted EBITDA will be down by around 19 per cent in the first half of 2020. Whilst the renewables activity increased by 4 per cent and upstream & midstream activity reduced by 5 per cent in H1 FY20.

Share Price Performance

1-Year Chart as at 24^th June 2020, after the market closed (Source: Refinitiv, Thomson Reuters)

John Wood Group Plc’s shares closed at GBX 200.90 on 24th June 2020, which was down by 8.26% against the last day closing price. Stock 52 weeks High and Low are GBX 560.80/GBX 100.90.

From the technical standpoint, shares were trading almost flat as compared to the short-term support level of 50-day simple moving average price.

Valuation Methodology
 

 
Growth Prospects and Risk Assessments
The Group said it has relatively robust activity in downstream & chemicals and renewables divisions. In April and May, the Group booked new orders of USD 1.3 billion. However, the risk of further delays and postponements persists in 2020. At the end of May 2020, the order book stood at 7 billion, a decrease of approximately 11 per cent from December 2019.

Conclusion
The Group witnessed a fall in revenue and profit(driven by COVID-19 mayhem and a decrease in oil prices), but it has secured USD 1.3 billion of new orders in April 2020 and May 2020. The safety from Coronavirus remains a top priority. Despite this 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 pace to protect margin. In Q2 FY20, WG had completed the actions required to deliver overhead cost savings of more than USD 200 million in FY 2020.

Based on the above rationale, we have given a “Buy” recommendation at the closing price of GBX 200.90 (as on 24th June 2020), with lower double-digit upside potential based on 10x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).

Petrofac Ltd - Operating with Capital Light Business Model and Diversified business to Tackle Short-term headwinds

Petrofac Ltd (LON: PFC) is a FTSE 250 listed company, which is engaged in the production and processing of oil and gas. It assists companies in transforming the value of their assets across the oil and gas life cycle. The Group operates through 24 offices and eight operational centres worldwide.

Petrofac will announce interim results for the period ended 30 June 2020 on 11^th August 2020.

Trading Update
On 24^th June 2020, the Group issued the following pre-close update on trading ahead of the announcement of half-year results, and on the swift and decisive action is taking to respond to the COVID-19 pandemic and sharp fall in oil prices. The Group also noted it stays unclear how long oil prices will stay at low levels. In the first half of 2020, the Engineering & Construction division has been hurt by the deterioration in market conditions. The Group said it had secured new orders of USD 400 million in Engineering & Construction in the year to date against the USD 1.6 billion a year before. In Engineering & Production Services (EPS), the first half revenue is projected to be approximately US$450 million, in line with the same period last year.  The Company noted that EPS had secured USD 0.6 billion of awards and extensions in the year to date, higher than USD 0.2 billion a year prior. In Integrated Energy Services (IES), the net production for the first half of 2020 is expected to be around 2.2 million barrels of oil equivalent (mmboe) (1H 2019: 2.1 mmboe), in line with management anticipations. On 31^st May 2020, the net debt stood at around USD 139 million (31 December 2019: USD 15 million net cash). Liquidity was around USD 1.2 billion at 31 May 2020 (31 December 2019: USD 1.5 billion).  In the year to date, the new order intake was USD 1 billion.

Share Price Performance

1-Year Chart as at 24^th June 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Petrofac Ltd’s shares closed at GBX 187.65 on 24th June 2020, which was down by 14.86% against the last day closing price. Stock 52 weeks High and Low are GBX 475.34/GBX 146.65.

From the technical standpoint, shares were trading almost flat as compared to short-term support level of 50-day simple moving average price.

Valuation Methodology

 
Growth Catalysts and Key Risks
The Group witnessed modest growth in Engineering & Production Services division. The Company has a tendering pipeline of USD 48 billion of opportunities scheduled for the award by the end of the year 2021 and an order book, which gives the good performance in revenue in the near-term. Nevertheless, despite all of the efforts, the sharp fall in oil prices and the COVID-19 pandemic have materially impacted new orders and financial performance in H1 FY20.

Conclusion
Looking ahead, the Group remains unclear how long COVID-19 and low oil prices will continue to hurt business performance and disrupt business activity. As a result, the full year 2020 revenue and margin guidance stays suspended. Over the last three years, Petrofac Ltd has transitioned the Company back into a more resilient pillar and strengthened the balance sheet. It has also grown the position in clean fuels, carbon capture, gas, and renewables. In the first quarter of 2020, the Group reported an increase in the order book. It has taken immediate action to mitigate the risk arising from the prevailing economic disruption, which will give the best position for the recovery when it occurs.

Based on the decent prospects and supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 187.65 (as on 24^th June 2020), with a lower double-digit-upside potential based on 9.00x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

* The “Buy” recommendation is valid for the current price as covered in the report as on 25th June 2020.

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