In today’s daily we have covered stock research on 2 Engineering Stocks To BUY (Skilled Group + Worley Parsons).









 
The S&P 500 was down by 29.63points or 1.43%on Wednesday to 2030.28 points. U.S. stocks extended their declines on Wednesday afternoon, with all three major indexes down more than 1 percent each as the energy sector resumed its recent slide along with oil prices. Falling oil prices have raised concerns about earnings for energy companies, with year-end tax selling putting additional pressure on the group. The sector, down more than 15 percent for the year so far, is the worst performing of the 10 major S&P sectors for the year.

Shares of Yum Brands Inc dropped 5.5 percent a day after it lowered its profit forecast for the year for the second time, hurt by slower-than-expected sales recovery in China following a food safety scare in July. Among the day's gainers were airline shares, including Southwest Airlines up 3.1 percent and was leading gains on the S&P 500. JPMorgan Chase & Co. plunged 2.8 percent. The S&P energy index was down 3.3 percent and led declines on the S&P 500, but all 10 S&P sector were down on the day, with most falling more than 1 percent. The S&P materials sector was down 2.1 percent.



J P Morgan Daily Chart (Source – Thomson Reuters)
S&P ASX 200was down by 23.7points or 0.45%on Wednesday and closed at 5259.0 points. Commonwealth Bank of Australia rallied in the afternoon to post a gain of 0.4 per cent at $82.35. Westpac Banking Corporation lost 1.6 per cent to $32.52, Australia and New Zealand Banking Group shed 1.2 per cent to $31.49, and National ­Australia Bank dipped 0.9 per cent to $32.30. Telstra Corporation slipped 0.4 per cent at $5.62, while Medibank rose 0.9 per cent to $2.24, the highest close since its debut late last month.
Resources giant BHP rose 1.8 per cent to $29.39, while Rio Tinto lifted 1.6 per cent to $56.40. Woodside ­Petroleum lifted 1.5 per cent to $34.90, despite the oil price resuming its retreat in the afternoon. SPI futures are down 58 points. The Australian dollar is trading at US82.95¢, compared with Wednesday’s local close of US83.20¢. Iron ore was up 8¢ at $US69.14 a tonne.

ASX 200 Daily Chart (Source – Thomson Reuters)
 
Top Performers on the ASX 200 were :-


 
2 Engineering Stocks To BUY

One interesting stock to look at is Skilled Group Limited (SKE) that has illustrated strong 1Q15 performance with revenue and earnings going up by >10% of pcp. The 2H14 performance has penetrated well into FY15. SKE exhibited robust FY14 performance with revenue of $1,873.3 million in 2H14 (6.7% higher than that of 1H14). Other highlights included promising results achieved for acquisitions; underlying EBITDA margin maintained at 5.1%; cost reduction of about $15 million in FY14, increase in total FY14 dividend to 17.0 cps and the like. The recent AGM update entailed strong Marine Services earnings which equipoised the continuing weakness in Workforce Services.


Engineering and Marine – Financial Performance (Source – Company Reports)

The move to have 100% ownership of Offshore Marine Services Alliance Joint Venture (OMSA) by acquiring the 50% holding from PB Sea-Tow Holdings (BVI) Limited is the hot best bit for SKE. The acquisition is valued for A$6.9m and indicates the estimated cash to completion of the Gorgon construction contract. This business will be amalgamated with the acquired Broadsword business. Accretive in FY15, the business will help SKE position its marine business more broadly in the market. Additionally, at least $15m savings are expected in FY15 through process improvement and the benefit from systems investment.

Further, the earnings in FY15 may fetch support from the Saipem contract, which is otherwise progressing well. Moreover, supplier consolidation and the infrastructure sector may support the workforce business even though the trading conditions appear to be challenging. We do note that Australian economic conditions, oil price collapse and other such external factors may impose performance pressure. Nonetheless, the well-managed business with strong engineering and marine activity levels may be able to overcome such hurdles. Thus, we put a BUY recommendation for this stock at the current price of $1.33.

Another stock that gained our attention is WorleyParsons (WOR). The recent OPEC’s decision not to curb oil production may lead to reductions to E&P capex and may thus affect the market for WOR to some extent. However, there is a good expectation that growth will rebound as hydrocarbons capex reductions tend to be diminutive. Further, WOR has illustrated a strong balance sheet which should enable it to handle the downturn. For instance, WOR’s net debt was AUD 510 million with gearing at a low 19%, at the end of fiscal 2014. It also does not appear to be highly vulnerable to the weakening Australian market.


Worley Parsons Daily Chart (Source - Thomson Reuters)

The Company is on the front foot in exploiting M&A opportunities, and has its efforts in winning new contracts becomes a key highlight. For example, WOR won the recent award of an engineering, procurement, construction and installation (EPCI) contract (167 million AUD) for ConocoPhillips’ capacity increase project in the Norwegian part of the North Sea.


Technical Capability (Source – Company Reports)

WOR gets about 75% of its EBIT from hydrocarbons. The capex cut impact may not be seen in FY17 although little turbulence is expected in FY15-16. Thus, a sturdy flow of new hydrocarbon project work is required for growth. It is also noted that for the all the sectors – Hydrocarbons, Minerals, Metals & Chemicals, and Infrastructure, the aggregated revenue and EBIT for FY14 are lower than the previous corresponding period. Nonetheless, the reorganization into three business lines – Services, Major Projects and Improve would enable WOR to perform better.


Major Projects (Source – Company Reports)

The Company has exposure to upstream conventional oil and gas project and maintenance work along with heavy oil and oil sands project and operational infrastructure work. Its specialized services are expected to create long-term demand. Major project opportunities for award in FY15 for ~$1B revenue have been identified. The key upstream developments entail works at onshore Alaska & Western Canada LNG, offshore East Africa, deep water, and arctic. Geographic expansion works include efforts in Mexico and East Africa. Other exemplary opportunities include Middle East hydrocarbons, Saudi Arabia power market, port expansions in the Middle East, and growth opportunities in East Africa hydrocarbons, Mexico (hydrocarbons) and Ecuador. Given the entire story, we put a BUY recommendation for this stock at the current price of $9.71.
 
Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.
Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).
The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.
Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.
The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide.