John Wood Group PLC (LON: WG.) – Significant net debt reduction of USD 410 million during FY20

John Wood Group PLC is a global leader in consulting, projects & operations solutions in energy and the built environment. The Group operates through four broader divisions, namely, ASEAAA (Asset Solutions Europe, Africa, Asia, Australia), ASA (Asset Solutions Americas), TCS (“Technical Consulting Solutions”), and Investment Services. The Group employs over 45,000 people in more than 400 offices in over 60 countries. Moreover, it would aim to simplify the business model to three global business units: Consulting, Projects, and Operations. It is a constituent of the FTSE 250 index.

On 24 June 2021, the Company will release a pre-close trading update for the six months ended 30 June 2021. 

 (Source: Company presentation)

Growth Prospects and Risk Assessment

• Sale of JV interest in Sulzer Wood – WG. had completed the sale of Sulzer Wood Ltd to the parent Company Sulzer for the total consideration of USD 17.5 million. Moreover, the cash proceeds would be utilized to decrease the debt levels and accelerate progress towards the target leverage.
• Innovative clean energy solutions – The Company had a strong track record of delivering strong clean energy solutions for renewables and future fuels. Moreover, it had recently completed the innovative Hydrogen 100 project in partnership with SGN regarding the production of green hydrogen to heat up to 300 homes.
• The setting of greenhouse gas emission reduction targets– The Company remained committed to reducing scope 1 and 2 emissions by 40% till 2030 and become net zero soon.
• Future Fit Programme – WG had accelerated its progress on the 18-month programme to unlock stronger medium-term growth, deliver efficiency and create value. Moreover, the Company would aim to achieve efficiency savings of USD 40 million in 2021.

(Source: Company presentation)

Key Risks

• Strategic Agility – The top-line business would be adversely affected in case the strategy fails to deliver a sustainable business model with differentiated service offerings.
• Contracting – The weakness in the contract bidding process, misalignment of contract terms, inappropriate pricing, and failure to comply with the terms of the contract might result in poor financial performance.
• Project Execution – The failure in executing projects within the stipulated time and proper budget may impact the business.
• Major Litigation – The legal issue might get emerged from a major regulatory investigation, contracting issues and major accident. Moreover, failure to manage litigation could result in increased damages, penalty, and claims.

Subsequently, we will analyse the Key Fundamental Statistics & Key Shareholders Statistics of John Wood Group PLC.

Aberdeen Standard Investments (Edinburgh) is the most significant shareholder as it holds nearly 38.72 million shares as of 31 March 2021.

AGM Statement (as of 13 May 2021)

The order book during Q1 FY21 had shown an increase of around 9.0% from December 2020 levels, and it stood at USD 7.10 billion due to good growth in Consulting and Operations. The EBITDA remained lower during Q1 FY21 as compared to an equivalent period of the prior year. Mary Shafer-Malicki had resigned as a non-executive director on 13 May 2021.

FY20 Financial Highlights (for the twelve months ended 31 December 2020, as of 16 March 2021)

(Source: Company result) 

• The revenue of the Company had declined by around 23.5% to USD 7.6 billion during FY20 due to the significant reduction in conventional energy activity.
• On the profitability front, the Group had delivered a decent adjusted EBITDA margin of 8.30% during FY20, illustrating strong operational delivery in ASEAAA and TCS.
• had a significant financial headroom of USD 1.74 billion, with revolving credit facilities extended to May 2023.
• With regards to the financial position, WG. had reported a significant reduction of around 28.8% in net debt excluding leases from USD 1.42 billion as of 31 December 2019 to USD 1.01 billion as of 31 December 2020.

Financial Ratios (FY20)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 19 May 2021, at 11:25 AM GMT, WG.’s shares were trading at GBX 259.00, down by around 2.30% from the previous day closing price. Stock 52-week High and Low were GBX 367.20 and GBX 179.44, respectively.

On a weekly chart, the stock is trading below an upward sloping trend line breakout for the past two months; however, getting major support from a trend-following indicator 50-period SMA, indicating an upside reversal from the current levels.

In the last year, WG.’s stock price had delivered a positive return of ~34.62% and the FTSE 250 index had produced a return of about 36.39%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The strategic broadening had enabled revenue resilience as WG made 65% of revenue from renewables & other energy, process & chemicals, and built environment during FY20. However, the Company remained cautious regarding the volatility of oil price and uncertainty around the Covid-19 pandemic. Nevertheless, it would continue to seek opportunities to accelerate energy transition progress and achieve operational efficiencies. Moreover, the order book of USD 6.50 billion at the end of FY20 reflects 67% of projects to be delivered during 2021. The Company had witnessed positive momentum in new orders during Q1 FY21 and remained ahead of December 2020 levels. The Group would emphasize more on improvement in margin and cash flow driven by maintaining high utilisation, improved project execution and operational and efficiency improvements. Nevertheless, the Company has generated substantial operational efficiencies with a reduction in net debt during 2020. In a nutshell, the increased proportion of higher-margin Consulting revenues would deliver a full-year margin improvement.

(Source: Company presentation)

Considering the decent order book, strong liquidity profile, medium-term strategic targets, reduction in the net debt, modest financial performance, and support from the valuation as done using the above method, we have given a “BUY” recommendation on John Wood Group at the current price of GBX 259.00 (as on 19 May 2021 at 11:25 AM GMT), with lower-double digit upside potential based on 19.51x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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