ii view: Wood Group eases debt concerns

The nuclear business is sold, and there's a focus on debt and dividend yield over 6%. 

Trading update for the year ended 31 December 2019

• Revenue of around $ 10 billion 
• Operating profit expected to be in line with current analyst forecasts
• Net debt to be below $1.5 billion at 31 December 2019 
• Disposal of nuclear business on track to complete in Q1 2020

Chief executive Robin Watson said:

"Our full year 2019 results will demonstrate earnings growth, margin improvement and strong operational cash generation, resulting in a reduction in net debt. In Q4 we outlined our clear strategy to focus on higher margin project management, operations and consulting activities and announced the formation of our Technical Consulting Solutions business. We also continue to make good progress on portfolio rationalisation. 

"Looking ahead, our business is well positioned across its energy and built environment markets and we expect to deliver earnings growth in 2020." 

ii round-up:

Oilfield services provider, Wood Group (LSE:WG.), reported robust trading in this end of year statement ahead of full-year results. 

Both revenue and profits are expected to be in line with current analyst forecasts. But group debt, raised following its 2017 acquisition of rival Amec Foster Wheeler, is expected to fall under $1.5 billion (£1.35 billion), below expectations and down from $1.77 billion at the half year stage. 

The share price rose by more than 7% in late UK trading. 

A stronger second half benefitted from growth in operations work in the Middle East, Caspian and Asia Pacific, offsetting slowing US onshore drilling demand.

Wood Group, whose expertise stretches from innovative pipeline design to wind turbine and tidal energy, expects the previously announced sale of its nuclear business to complete in the first quarter of 2020. 

Accompanying outlook comments pointed to modest revenue growth in 2020, with management’s margin improvement strategy supporting growth in adjusted profits or Earnings before interest, tax, depreciation and amortization (EBITDA). 

ii view:

With the oil & gas industry a core group sector, business demand is to some degree linked to the volatile oil price. Other sectors include infrastructure, mining and power. 

The sale of its nuclear business reduces diversification but allows for increased management focus on areas of strength such as oil & gas. 

For investors, a 20%-plus fall in the share price during 2019 should act as a reminder as to the inherent risks. That said, a forward price/earnings (PE) valuation below the three and ten-year averages offers some enticement. Encouraging cash generation and reduced debt should also help support an estimated dividend yield of over 6.5% (not guaranteed), although currently covered less than 1.5 times by earnings, providing further attraction in this low interest rate environment. 

Positives: 

• Business disposals allow for greater focus on areas of leadership and strength
• Attractive dividend payment

Negatives:

• Underlying customer investment can be volatile and uncertain
• Although being targeted by management for reduction, group debt remains a focus 

The average rating of stock market analysts:

Buy