John Wood Group PLC (LON: WG) - Renewable Energy & Sustainable Infrastructure Would Drive Long-Term Growth

John Wood Group is a global engineering and consultancy company. The Company provides performance-driven solutions throughout the asset life cycle to industrial markets, including upstream, midstream and downstream oil & gas, power, infrastructure, clean energy, mining, nuclear and general industrial sectors.  The services provided by John Wood include operations solutions, capital projects, clean energy solutions, digital & technology solution, mining & minerals solutions, automation and control solutions. The Company has operations in North America, Europe, Asia-Pacific, Caspian, the Middle East, Latin America and Africa. The Company has more than 45,000 employees in over 400 offices across 60 countries. John Wood Group is listed on the FTSE-250 index.

John Wood Group will release the trading update for the year ending 31 December 2020 on 14 January 2021.

Solutions and End-Markets

(Source: Company website)

Growth Prospects and Risk Assessment

John Wood Group is well-positioned for energy transition and sustainable infrastructure. The Company has put in place a strategic cycle with a strong operational platform with right capabilities, end market exposures, and the strategy will run through 2023 to deliver growth from a premium, differentiated, higher market business associated with energy trends and sustainable infrastructure. The Company is deleveraging the business, and it has disposed of the industrial and nuclear service business, which was completed in the first quarter of 2020.

 

 (Source: LSE, chart created by Kalkine Group)

The environmental issues are the major concerns globally, and the Company has set a sustainable strategy to achieve long-term growth in the business. The portfolio optimization and ability to deliver organic growth would help in margin improvement. Some of the growth catalysts for the Company include petrochemical capacity addition in the Middle East, demand for unconventional oil & gas, solar capacity addition, government infrastructure investment and industrial investment in automation and infrastructure.

 (Source: Company website)

However, the Company is engaged in the business services and solutions, and its weakness in contract bidding, inappropriate prices and failure to comply with contractual conditions can affect the business performance and ability. Any harm caused to the environment while performing the operations could lead to reputational damage, and business may become an unattractive business proposition. Lack of proper project management, inadequate resourcing and technical execution would affect the quality, and the project might not be finished on time and within budget.

Industry Outlook Dynamics

As the energy transition is gaining pace, renewable, alternative energies, and built environment are more in focus than the traditional upstream oil & gas projects. The capital investment in the renewable energy sector is increasing with the growth in the US solar and wind market, and the outlook is positive. The covid-19 has impacted the investment budget in the chemical & downstream business, and the outlook is uncertain; however, the business outlook for specialist chemicals and speciality life sciences is resilient. There has a significant budget cut in the upstream and midstream business sector, and the long-term recovery is dependent on global demand. IEA is projecting a growth of 5.3 million barrels per day in 2021. Sustainable infrastructure has a resilient market in the medium-term, and it has growth potential if fiscal stimulus measures are adopted in the UK, US and Canada for covid-19. The government priorities and UN sustainable development would support the demand in the long-term.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of John Wood Group Plc.

Recent Developments

On 21 October 2020: The Company stated that it had made an application for a block listing of 20 million Ordinary shares of 4 and 2/7 pence each to the UK Listing Authority and the London Stock Exchange.

On 9 October 2020: The Company announced the extension of the revolving credit facility (RCF) to May 2023. Wood's financial headroom and strong liquidity were in line with the conservative approach to debt financing arrangements.

A Glimpse of Business Segments

(Source: Company Website)

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 18 August 2020)

Financial Ratios (H1 FY2020)

Share Price Performance Analysis

On 4 November 2020, at the time of writing (before the market close, at 8:01 AM GMT), John Wood Group Plc shares were trading at GBX 210.39, down by 2.96% against the previous day closing price. Stock 52-week High was GBX 426.40 and Low of GBX 100.90, respectively.

From a technical standpoint, we could see a positive movement in the share price based on the 90-day RSI level (49.4) and 150-day SMA (GBX 208.8).

Based on 6-months performance, WG has outperformed the FTSE All-Share Oil Equipment & Services Index and FTSE-250 Index. WG generated a return of around 23.1%, whereas FTSE All-Share Oil Equipment & Services Index return was about 3.8% and FTSE-250 Index return was close to 9.9%.

Valuation Methodology: EV/EBITDA Approach (NTM) (Illustrative)

 

Business Outlook Scenario

In H1 FY20, the Company reported strong earnings that were on the higher side of the guidance, and it maintained the balance sheet strength through net debt reduction. John Wood has a strong order book through new contract wins amid challenging market conditions. In H1 FY20, the Company booked new orders of USD 3.3 billion, of which USD 1.7 billion have been secured since early March 2020, and the total order book stood at USD 7.0 billion. The Company would deliver projects worth USD 3.1 billion in H2 FY20. The Company has witnessed a healthy trading environment in the chemical, renewable and downstream market as compared to upstream and midstream markets. Some of the new project wins include construction work for GSK, wind & solar EPC project in the US, work to increase oilfield production in Iraq and an upstream project contract extension in the UK.

John Wood has an objective to maintain the 2020 EBITDA margin at 8.6%. The target margin is expected to be achieved by achieving an overhead cost reduction of more than USD 200 million. It would focus on generating strong cash flow that would help in reducing the net debt of the Company. The improved working capital environment and reduction in provision would underpin the strength of the balance sheet. The Company caters to diverse end markets, and it expects to benefit from increased government spending.

(Source: Company website)

Considering the sustainable business model, decent operating and financial performance, lower net debt, robust cash generation, improved margins in ASEAAA & TCS, 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 210.39 (as on 4 November 2020, before the market close at 8:01 AM GMT), with lower-double digit upside potential based on 5.87x EV/NTM EBITDA (approx.) on FY20E EBITDA (approx.).

 

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

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