ii view: what a tough first half means for Wood Group

Customer project spend remains under a Covid cloud, but the order book is up. Buy, sell or hold?

First-half results to 30 June 2021

• Revenue down 23% to $3.15 billion
• Adjusted profit (EBITDA) down 14% to $252 million
• Order book up 12% to $7.7 billion from the end of May
• Net debt up 5% to $1.28 billion

Guidance:

• Expects full year revenue of between $6.6 billion and $6.8 billion

Chief executive Robin Watson said:

"The first half of 2021 reflects improving momentum in activity in Q2 and a strong margin improvement, with increased margins in all business units and a greater weighting of high margin Consulting activity. Trading momentum and good growth in our order book, which is up c18% year-to-date, underpin our confidence in delivering a stronger second half which will reflect a return to growth compared to both H1 2021 and H2 2020, and further growth in our full year adjusted EBITDA margin."

ii round-up:

Wood Group (LSE:WG.), a global engineering and consulting company focussed on the energy industry, today left its full-year outlook unchanged, with increased activity in consulting and growth in operations expected to partly offset lower activity for its projects business. 

Annual revenue is expected to come in at between $6.6 billion and $6.8 billion, lower than analyst estimates of nearer to $6.9 billion and down from last year’s $7.6 billion. First-half revenue to the end of June fell 23% to $3.15 billion, hit by reduced customer expenditure under pandemic uncertainty and business sales. 

John Wood shares fell by more than 2% in UK trading, adding to a near 25% fall since the start of the year. Shares for rival oil and gas support services company Petrofac (LSE:PFC) are down by a similar amount during 2021. Oil majors BP (LSE:BP.) and Royal Dutch Shell (LSE:RDSB) are both up by more than 10%. 

Wood Group provides engineering and consulting services to the energy industry and others across more than 60 countries. Its expertise stretches from innovative pipeline design to wind turbine and tidal energy.

Adjusted profit (EBITDA) for the half year fell 14% to $252 million. Activity for its process and chemicals customers, accounting for a fifth of sales, reduced significantly as larger projects reached completion. 

Group net debt, hindered by the timing of customer payments, rose 5% to $1.28 billion. Management declared no interim dividend, leaving the payment suspended. 

However, its order book climbed 12% from the end of May to $7.7 billion. Market conditions for its conventional energy business, accounting for just over a third of group sales, were highlighted as improving. 

ii view:

Employing around 40,000 people, the Aberdeen headquartered company operates via the three divisions of projects, consulting and operations. Its capital projects business, accounting for almost 40% of revenues, offers construction and engineering to all aspects of conventional energy, process & chemicals and renewable energy & power. Its multi-sector consulting business, accounting for a further 30% of sales, provides some 12,000 consultants to the energy and the build industries, while the operations division provides maintenance and asset optimisation services. 

In 2020, the US generated almost half of all group sales. A strategy to broaden its business and align it with growth opportunities in energy transition and sustainable infrastructure is being pursued. 

For investors, the hit from the pandemic remains evident. Customer project expenditure remains subdued. The dividend, a former attraction, remains suspended, and fines from regulatory investigations are likely to drag on future cashflows.   

More favourably, strength in the built environment has been seen, while market conditions across its conventional energy arenas have improved, particularly in operational management. The order book is up, with relatively robust activity flagged in renewable energy. And a price-to-net asset value of 0.5 times compares to a three-year average of 0.8 times. In all, and while some caution looks sensible, an estimated analyst fair value share price of 296p does imply room for upside over the longer term.  

Positives: 

• Winning alternative energy contracts
• Targeting cost savings 

Negatives:

• Ongoing pandemic uncertainty
• Underlying customer investment can be volatile and uncertain

The average rating of stock market analysts:

Strong hold