Interactive Investor

ii view: Wood Group details City beating profits

13th July 2023 11:37

by Keith Bowman from interactive investor

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Under relatively new management and with a refreshed strategy. We assess prospects. 

three wind turbines green environment clean energy 600

First-half trading update to 30 June

  • Revenues up 15% to $2.9 billion (£2.2 billion)
  • Adjusted profit (EBITDA) up 6% to $195 million (£150 million)
  • Net debt of $650 million (£501 million), up from $393 million back in December

Chief executive Ken Gilmartin said:

“We are making good progress in delivering on the growth strategy we outlined last November. Trading shows continued good growth and margins in line with our expectations. As we look ahead, we are confident of our delivery both for the full year and medium term, including a return to generating positive free cash flow".

ii round-up:

Energy industry focused engineer and consultant John Wood Group (LSE:WG.) today detailed revenue and profit which beat City forecasts, although net debt rose due to year-to-date negative cashflow. 

Growth across all its businesses drove first-half revenue up 15% to $2.9 billion (£2.2 billion), pushing adjusted profit up 6% to $195 million and surpassing analyst estimates for nearer $190 million. 

Shares in the FTSE 250 company, which earlier in the year saw US private equity firm Apollo walk away from a £1.7 billion takeover, remained little changed in UK trading. Wood shares fell from over 220p to under 140p following the aborted bid approach back in mid-May. Fellow energy focused engineer Petrofac Ltd (LSE:PFC) is up by a fifth since then, while oil majors BP (LSE:BP.) and Shell (LSE:SHEL) are little changed.  

Wood Group’s net debt during the half year rose to $650 million from its December year-end $393 million, hindered by outgoings including a tax bill for the 2022 $1.8 billion sale of its Built Environment Consulting business. Second-half cashflows are expected by management to prove positive, potentially helping net debt reduce to $574 million this December. 

In November 2022, relatively new CEO Ken Gilmartin detailed a renewed company strategy including plans to become more growth-focused, targeting both traditional oil, gas, and chemical markets along with smaller growth potential arenas such as hydrogen and carbon capture, and mineral and life science companies. 

New business during the half-year included a two-year $250 million contract extension for a major South-East Asian oil & gas producer, a $50 million contract for pharma business GSK (LSE:GSK) and the expansion of its support for Chevron Corp (NYSE:CVX) renewable energy biofuel facility. 

The order book rose 3% year-over-year to $6 billion, with staff headcount rising 5% to around 35,600. 

First-half results are scheduled for 22 August. 

ii view:

Started in 1982 and headquartered in Aberdeen, Wood Group's expertise today stretches from innovative oil and gas pipeline design to wind turbine and tidal energy projects.  Its biggest slug of sales comes from the USA, with the UK and Canada providing other major markets. Its renewed strategy also includes a focus on lower risk and reimbursable work. 

For investors, increased debt in an era of rising interest rates is unhelpful, the highly uncertain economic outlook and casting a shadow over energy demand and prices is not to be forgotten, while the dividend has been halted since the second half of 2019. 

On the upside, a new management team is now pushing a refreshed strategy. Contract legacy issues have been addressed, its universe of potential customers now includes life science companies, while opportunities to aid customers with renewable energy projects a focus. And despite a failed bid in May, the fact that a potential buyer showed interest keeps speculators interested. 

For now, and while room for caution persists, signs of momentum in its new strategy appear to be emerging, with an analyst consensus estimate of fair value of over 200p per share adding to longer-term optimism. 

Positives: 

  • Pursuing alternative energy contracts
  • Targeting cost savings 

Negatives:

  • Dividend suspended
  • Underlying customer investment can be volatile and uncertain

The average rating of stock market analysts:

Hold

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