ii view: Wood Group shares slump in response to new strategy

Shares for this FTSE 250 company are now down by around a quarter year-to-date despite an ongoing transformation. Buy, sell, or hold?

Strategy and ten-month trading update to 31 October

Chief executive Ken Gilmartin said:

"Our turnaround is progressing well, accelerated by the sale of Built Environment Consulting and helped by the work done to focus the Group on lower risk, reimbursable work. We have addressed legacy issues and our strong balance sheet will allow us to deal with the defined schedule of resulting cash outflows.”

ii round-up:

Energy industry focused engineer and consultant John Wood Group (LSE:WG.) today outlined a series of medium-term financial targets under its refreshed strategy which missed City expectations. 

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Under new leader Ken Gilmartin, the FTSE 250 company plans to become a more growth focused corporation, 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. 

Management hopes for a flat profit margin near term followed by some expansion medium term contrasted with analyst hopes for growth commencing next year. 

Wood Group shares fell by more than 10% in UK trading having come into this latest announcement down by nearly a fifth year-to-date. That’s similar to both rival Petrofac Ltd (LSE:PFC) and the wider FTSE 250 index. Shares for Shell (LSE:SHEL) and BP (LSE:BP.) are up by more than two-fifths during 2022 and in the wake of Russia’s invasion of Ukraine. 

Current full year Wood Group forecasts remained in line with City expectations, with revenues of between $5.2 billion and $5.5 billion and adjusted profit (EBITDA) of between $370 million to $400 million. 

Earlier this year Wood sold its Built Environment Consulting business for $1.8 billion with proceeds going towards a reduction of debt. Net debt at the year-end is expected to be between $350 million to $400 million, excluding leases but including a recent legal settlement. That’s marginally above City forecasts nearer to $315 million. 

Wood is now targeting medium term leverage in the range of between 0.5 to 1.5 times net debt (excluding leases) to EBITDA. That’s down from 4.2 times as of its half year results, although that was before the sale of its Built Environment business.  

A full year trading update maybe announced in January. 

ii view:

Started in 1982, Wood Group today employs over 30,000 people across both engineering and consulting services. Its expertise 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. 

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For investors, a highly uncertain economic outlook cannot be overlooked for its potential impact on energy demand and therefore customer demand for new build projects and investment. The price of oil, a key factor in undertaking capital expenditure projects, remains highly volatile, while the dividend is still suspended and is unlikely to be reinstated near term give expected cash outflows. 

On the upside, a new management team is now pushing a refreshed strategy. Costs are a focus, legacy contracts have previously been addressed, net debt reduced following a major business sale, while opportunity in aiding with the move to non-carbon related fuels under climate change is being pursued. 

On balance, and while room for longer term optimism persists under its ongoing transformation, investors may for now wish to await concrete signs of recovery before adding to any existing shareholdings. 

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:

Buy