John Wood Group PLC (LON: WG.) – Unlocking stronger medium-term growth.

John Wood Group PLC is a is a multinational Energy Services Company based out of Aberdeen, Scotland. The Group operates through four divisions, namely, Asset Solutions EAAA, AS Americas, Technical Consulting Solutions, and Investment Services. It provides services related to consulting and project management in the energy domain. It serves with performance-oriented solutions throughout the asset life cycle across a broad range of industrial markets, including the upstream, midstream, and downstream oil & gas, among others. The Group employs over 45,000 people in more than 400 offices in over 60 countries.

On 16 March 2021, John Wood expects to announce full-year results for FY20.

  (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. In FY20, the Group has delivered a significant reduction in net debt of nearly US$400 million, and it has sizeable financial headroom of around US$1.75 billion to pursue upcoming growth opportunities. Moreover, the Group has strategic positioning in the market with differentiated services and strong customer relationships. Further, the Company has recently won a US$120 million contract from Sinopec for ethylene expansion in China, reflecting a long-standing relationship with the client. In a nutshell, it is well-positioned to deliver significant growth in the medium-term.

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, oil price volatility, unfavourable trade policies. 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.

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 19 January 2021: John Wood and Spirit Energy have entered into a new agreement, which is to partner on the delivery of late-life solutions in the Morecambe Bay gas fields. This agreement is for the five-year consolidated services contract and valued at approximately USD 130 million.

On 12 January 2021: The Company has secured a contract with Sinopec Hainan Refining and Chemical Limited Company, which was valued at more than USD 120 million. This will expand its refinery development in South China.

A Glimpse of Business Segments

Trading Update (for the year ended 31 December 2020, as on 14 January 2021)

• Despite a challenging trading environment, the Company delivered a resilient performance in FY20 and expected revenue to be around USD 7.6 billion (on a reported basis).
• In FY20, John Wood expects adjusted EBITDA to be in the range of USD 620-640 million, adjusted margin to be in between 8.2% to 8.4%. While operating profit before exceptional items will be approximately USD 215-235 million.
• In Asset Solutions Americas division, the Company expects revenue to be down by more than 20%, compared with 2019. While adjusted EBITDA margins will be down from 2019, but it has benefitted from cost reduction initiatives and improved utilisation. Moreover, in Process and Energy, the profitability will be approximately USD 50 million lower than in 2019.
• On a like-for-like basis, the revenue will decrease by around 20% (against 2019) in Asset Solutions EAAA division,. However, its adjusted EBITDA will be significantly up from 2019.
• In Technical Consulting Solutions division, the revenue will decrease by approximately 20% in FY20 (against 2019), including the nuclear business's disposal. Furthermore, the adjusted EBITDA margin is expected to be favourable (compared to 2019).
• Excluding leases, the Company expects net debt to reduce around USD 400 million at 31 December 2020 (compared with 30 June 2020).
• The Company has undrawn facilities of around USD 1.75 billion and extended the main revolving credit facility of USD 1.51 billion to May 2023.
• At the end of November 2020, the order book stood at USD 6.2 billion, with more than 60% due to being delivered in 2021. While the order book decreased by 22% from December 2020.
• Further, in 2021, the Company will continue to drive strong EBITDA margin delivery, maintaining the position as sector leaders in sustainability and ESG.

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 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 is well-positioned to take benefits from growth trends across the energy and industrial markets.
• 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 efforts to increase oilfield production in Iraq.

Financial Ratios

Share Price Performance Analysis

On 20 January 2021, at the time of writing (before the market close, at 8:17 AM GMT), John Wood Group shares were trading at GBX 309.67, down by 5.85% 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, 100-day EMA (283.00), 100-day SMA (266.20) and 14-day RSI (35.94) are indicating a bullish setup.

In the past six months, John Wood Group PLC’s stock price has delivered a return of +39.12% return as compared to +19.05 % return of FTSE 250 index and +9.83% return of FTSE All Share Oil & Gas index, which shows that the stock has outperformed the benchmark index and the sector.

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Business Outlook Scenario

John Wood benefitted from the resilience of the business model against a backdrop of Covid-19 disruption, and it also broadened its capabilities across the energy market. For FY20, revenue is expected to be around US$7.6 billion, while the EBITDA is projected to be nearly US$620-640 million. Due to ongoing Covid-19 impact, the order book was lower than the previous year. However, the Company has generated substantial operational efficiencies with a reduction in debt, and thus, it shall continue to drive substantial EBITDA margin and unlock stronger medium-term growth. Overall, 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.

 (Source: Presentation, Company Website)

Considering the agreement with Spirit Energy, expansion in China, robust revenue in chemicals & downstream segments, sale of the interest in TransCanada Turbines, resilient business model, decent operating and financial performance, a further reduction in net debt, decent cash generation capabilities, the higher-margin business focused on energy and built environment markets, 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 309.67 (as on 20 January 2021, before the market close at 8:17 AM GMT), with lower-double digit upside potential based on 10.52x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

 

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

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