John Wood Group PLC (LON: WG) – Ensuring balance sheet strength and asset light business model. 

John Wood Group PLC is a is a multinational Energy Services Company based out of Aberdeen, Scotland. The Company'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. It is engaged in consulting, projects and operations solutions in energy and the built environment. Its projects and operation lines are managed in Asset Solutions and its consulting offerings managed in Technical Consulting Solutions. It provides performance-driven solutions throughout the asset life cycle, from concept to decommissioning across a broad range of industrial markets, including the upstream, midstream and downstream oil & gas, power & process, environment and infrastructure, clean energy, mining, nuclear, and general industrial sectors. The Company has over 400 offices and 45,000 employees with operations in more than 60 countries.

On 14 January 2021, it expects to release its trading update for FY20 (ended 31 December 2020).

 (Source: Company Website)

Growth Prospects and Risk Assessment

John Wood Group has a flexible, asset-light business model, which ensures strong cash generation, and solid market positioning across Energy and Built Environment. During H1 FY20, it demonstrated resilience from strategic broadening across Energy and Built Environment markets and actions to reduce cost, protect margin & cashflow and ensure balance sheet strength. It delivered earnings at the upper end of H1 FY20 guidance with a significant reduction in net debt.

In H1 FY20, it secured US$3.3 billion of new orders, which reflects the breadth of diversification. It has over 40,000 employees successfully working remotely, and others are continuing to work on site. The Company also commits to reduce scope 1 and 2 greenhouse gas emissions by 40% by 2030. Overall, it is placed for growth in the medium term as market recovers and the energy transition gathers pace.

However, there are certain potential risks which can impact the business. The Company operates in multiple geographies, and profits can be impacted negatively due to the foreign exchange rate fluctuations. Moreover, if the Company is unable to start the projects with safety precautions with unexpected quality and over budget constraints, it would result in the project execution risk and might face a regulatory investigation. Global political uncertainty regarding trade policy also poses a risk for the Group, including protectionist measures and regulation or legislation in local markets. Furthermore, there was no interim dividend provided since uncertainty arising from Covid-19 and oil price volatility persists.

Industry Outlook Dynamics

According to the Grand View Research, the market size for global energy as a service is expected to reach US$172.9 billion by 2027, representing a CAGR of 14.6% from 2019 to 2027. The future demand for energy consumption is likely to be influenced by several factors, including change in climate policies and adoption of alternate source of energy. Moreover, 65% of total oil consumption is contributed by transport; hence, it can be impacted by the usage of electric vehicles as well. Contrarily, the rising population and increasing urbanization can boost the energy demand for economic activities.

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

Recent Developments

On 16 November 2020: The Company has completed the sale of the joint venture interest in TransCanada Turbines to TC Energy (John Wood joint venture partner), which is for a cash consideration of US$67 million. The sale will make a positive contribution towards attaining the leverage target and also represents a multiple of around 7.6x Wood's share of anticipated 2020 EBITDA. Moreover, the cash proceeds will be used to reduce the debt level.

A Glimpse of Business Segments

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

(Source: Company Website)

• 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.
• Revenue of US$4.1 billion demonstrates relative resilience from broad end-market exposure.
• Operating profit and Adjusted EBITDA were benefitted from good operational utilisation and reduced overheads.
• The Company witnessed strong liquidity and significant financial headroom, with net debt of US$1.22 billion.
• John Wood has improved margins in ASEAAA and TCS as compared to H1 FY19, offset by reduced margins in ASA.
• The Company has delivered a trading performance at the upper end of guidance.
• 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.
• It expects a good cash generation and a further reduction in net debt in H2 FY20.
• The Company is well-positioned to take benefits from growth trends across the energy and industrial markets.
• In FY20, the objectives are to maintain margins in line with 2019 and deliver strong cash flow.
• Undrawn facilities are US$1.627 billion as compared to the total financing facilities of more than US$3 billion. Facilities include a revolving credit facility of US$1.75 billion, bilateral term loans of US$300 million, and an approximately US$880 million of US private placement debt with no near-term maturities.
• Led by the uncertainties caused by the Covid-19 pandemic, the Board considers it prudent not to pay a 2020 interim dividend.
• Some of the new project wins include wind & solar EPC project in the US, construction work for GSK, an upstream project contract extension in the UK and work to increase oilfield production in Iraq.
• Moreover, the Company has a proven track record of leveraging the flexible and asset-light model at a decent pace to protect the margins.

Financial Ratios (H1 FY2020)

Share Price Performance Analysis

On 2 December 2020, at the time of writing (before the market close, at 9:10 AM GMT), John Wood Group shares were trading at GBX 293.40, down by 4.58% against the previous day closing price. Stock 52-week High was GBX 426.40 and Low of GBX 100.90, respectively.

From the technical standpoint, the shares were trading above the short-term support level of 20-day (around GBX 273.40), 50-day (approximately GBX 238.10) and 100-day (around GBX 229.50) simple moving average price. Also, the MACD line is placed above the central line, indicating a bullish setup.

In the past six months, John Wood Group PLC’s stock price has delivered a positive return of ~48.62% return as compared to positive ~14.86%  return of FTSE 250 index and a negative ~5.87% return of FTSE All Share Oil & Gas index, which shows that the stock has outperformed the benchmark index and the sector.

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

Business Outlook Scenario

During H1 FY20, the Company delivered the trading performance at the upper end of guidance. In FY20, the objectives are to maintain margins in line with 2019 and deliver strong cash flow. The Company expects a good cash generation and a further reduction in net debt in H2 FY20. The Company has many value-accretive projects in the pipeline with low risk and higher production capabilities. It is well-positioned to take benefits from growth trends across the energy and industrial markets. Moreover, the Company has a proven track record of leveraging the flexible and asset-light model at a decent pace to protect the margins. Overall, the Group seems to be well-positioned to deliver a strong performance in the long run. The relative resilience in chemicals & downstream, renewables and built environment shall help mitigating challenges in upstream/midstream.

(Source: Presentation, Company Website)

Considering the sale of the interest in TransCanada Turbines, decent operating and financial performance, lower net debt, robust cash generation capabilities, improved margins in ASEAAA & TCS, focus on energy and built environment markets, the positive contribution towards achieving the leverage target, 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 293.40 (as on 2 December 2020, before the market close at 9:10 AM GMT), with lower-double digit upside potential based on 7.37x 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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