ii view: John Wood shock triggers share price crash

Third-quarter trading update to 30 September

• Revenue up 1% year-over-year to $1.48 billion (£114 million)
• Adjusted Q3 profit or EBITDA is lower
• Adjusted Q3 profit or EBITDA for 9 months late September down 4% year-over-year
• Order book $5.4 billion, down from $6.1 billion in late June

Guidance:

• Continues to expect high single digit growth in full-year adjusted EBITDA, before the impact of disposals
• Continues to expect net debt (excluding leases) as of 31 December 2024 to be similar to year-end 2023 ($694 million or £534 million)

Chief executive Ken Gilmartin said:

"We continue to make progress on our turnaround, building a simpler, higher quality Wood. The increasing quality of our business is evidenced by higher pricing, expanded margins and a higher share of our pipeline from sustainable solutions. It was, however, a mixed quarter for group performance.”

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ii round-up:

Energy industry engineer and consultant John Wood Group (LSE:WG.) today maintained its full-year profit and net debt expectations, but warned that an independent audit review of the group’s accounts was being conducted by Deloitte.

The review will focus on reported positions on contracts in projects, accounting, governance and controls, including whether any prior year restatement could be necessary.

Shares in the FTSE 250 company plummeted 60% or more in UK trading having come into this latest news down around 14% year-to-date. Rival Petrofac Ltd (LSE:PFC) has already fallen 66% in 2024 compared with the FTSE 250 index which is up 5%. 

Wood Group’s expertise stretches from oil and gas pipeline design to wind turbine and tidal energy projects. Both the projects division, laying new pipelines for example, and operations, maintaining customer facilities, generated just over 40% of 2023 revenues – with consultancy services making up the balance. 

Revenue rose 1% year-over-year in the third quarter to $1.48 billion, as strong growth in operations offset lower revenues in projects and consulting. 

Adjusted profit, or EBITDA, for the nine months to late September was down 4% as strong growth in operations and modest expansion in consulting partly offsetting weakness in projects.

Wood continues to expect high single digit growth in annual profit before the impact of disposals, aided by an expected strong fourth quarter performance.

Group net debt at the year-end - excluding leases and subject to the sale of EthosEnergy completing - is expected to be similar to the $694 million reported as at 31 December 2023. Wood’s order book as of 30 September totalled $5.4 billion, down from $6.1 billion in late June and 8% lower than a year ago. 

A full-year trading update might be announced in January. 

ii view:

Started in 1982, the Aberdeen headquartered company today employs more than 30,000 people. The USA generated its biggest slug of sales during 2023 at 24%, with other significant contributors including the UK at 13%, Canada 6%, Australia 5% and Saudi Arabia at 4%. Previously announced contract wins have included support for a major offshore clean power project in Germany, engineering work for a green hydrogen project in Spain, along with helping oil major BP (LSE:BP.) with its Murlach North Sea development. 

For investors, the company has refreshed its strategy, wanting to target likely growth areas such as hydrogen and carbon capture, simplify the business and cut costs. 

However, a review of the group’s accounts could raise discrepancies which then impact future profits. Expected year-end group net debt of $694 million compares to a current stock market value of £327 million. Ongoing uncertainty over the economic outlook continues to cast a shadow over energy demand and therefore required infrastructure, while any escalation of global geopolitical tensions could potentially disrupt group operations. Despite a previous attempted takeover of the company, renewed M&A interest is less likely right now given the circumstances.  

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While management is confident about annual profit, news that Deloitte is carrying out an independent review of the business is a big red flag for investors.

Positives: 

• Pursuing energy transition contracts
• Subject to a previous takeover attempt 

Negatives:

• Deloitte accounting review
• Underlying customer investment can be volatile and uncertain

The average rating of stock market analysts:

Buy