Company Overview: Worley Limited (ASX: WOR) is engaged in providing engineering design and project delivery services, including maintenance, reliability support services, and advisory services to energy, chemical and resources sectors. The company operates in four lines of business – (1) Energy & Chemicals Services, (2) Mining, Minerals & Metals Services, (3) Advisian, and (4) Major Projects & Integrated Solutions including construction and fabrication yard activity. On Customer sector Group’s front, the company serves Energy, Chemicals, and Resources sectors.


WOR Details
 


Improvement in Bottom-Line: Worley Limited (ASX: WOR) is a leading global professional services company that provides engineering design and project delivery services to energy, chemical and resources sectors. Last year in April, the company completed its acquisition of the Jacobs Energy, Chemicals, and Resources Division (ECR) from Jacobs Engineering Group Inc. Following this, the company introduced a new operating model which consists of the following four lines of business: Energy & Chemical Services; Mining, Minerals & Metal Services; Major Projects & Integrated Solutions; and Advisian. As a result of the ECR acquisition, the company has enhanced the diversity and resilience of its earnings with more consistent earnings through increased proportion in opex, chemicals, and North America and Europe. Over the last few years, the company has witnessed significant improvement in its bottom line with NPATA increasing from $36.9 million in 2016 to $172.3 million in 2019. Over the same period, the net profit margin has increased from 0.6% in 2016 to 2.7% in 2019. 


Financial Performance (Source: Company Reports)

The company is currently focused on simplifying its business to support its customers in a better manner, to drive new ways of working, to support the execution of strategies to deliver value, and to reduce the cost base. The company recently introduced a transformation strategy that focuses on enhancing the company’s leadership position in energy, chemicals and resources space, and change the way it works by leveraging automation and the use of digital products. Through its transformation, the company expects to deliver $275 million (run rate) in operational savings by the end of 2021. These savings are additional to the $175 million ECR acquisition cost synergy target. 

FY19 Results’ Highlights: For the financial year 2019, the company reported NPATA of $172.3 million, compared with $72.8 million in FY2018. Underlying NPATA was $259.8 million for FY2019, up $77.8 million on the previous corresponding period. Due to the contribution of the ECR business acquired in April 2019, the company’s aggregated revenue increased by 36% to $6439.1 million. Over the year, the contract backlog increased to $18 billion, representing a pro forma increase of 10% in the period.

Cash flow from operations was $236.3 million in FY19, down from $259.7 million for the prior corresponding period. For the full year, the company paid a total dividend of 27.5 cents per share, representing 52.2% of full-year underlying profit after tax.


FY19 Results (Source: Company Reports)

ECR Acquisition: During the financial year 2019, Worley Limited drastically transformed itself with the completion of the acquisition of ECR and as a result of which the company has become a pre-eminent global provider of professional projects and asset services in energy, resources and chemicals sectors. The company has been delivering the benefits of the acquisition of ECR including the realization of cost, margin and revenue synergies. The Cost synergy targets have increased from $130 million (pre-acquisition) to a current level of $175 million. These synergies are expected to be delivered over two and a half years post-completion. Further benefits are expected to be achieved from revenue, shared services, and global delivery synergies. 

H1 FY20 Results Highlights: For the first half of FY20, the company reported aggregated revenue of $5,998 million, up 134% on pcp, driven by improved market conditions and contribution from ECR. During the period, the company saw more consistent earnings through increased proportion in opex, chemicals and North America and Europe. For the period, the company reported Underlying NPATA od $216 million, up 110% on pcp.
During H1FY20, the company experienced growth in all regions, particularly North America. Strong performance in Norway and Canada from construction and fabrication revenue was also observed. The company’s aggregate revenue in APAC region increased by 84% to $1,077 million in H1FY20, as compared to pcp. 

In Energy & Chemicals Services’ business, the company reported aggregate revenue of $2,605 million in H1FY20, up 134% on pcp. For the same period, the aggregate revenue for Mining, Minerals & Metals Services, increased by 489% to $636 million. The aggregate revenue for Major Projects & Integrated Solutions increased by 133% to $2,432 million and for Advisian, the revenue grew by 26% to $325 million.

For the half-year period, the Board has declared an interim dividend of 25 cents (unfranked) per fully paid ordinary share. Backlog at 31 December 2019 increased to $18.7 billion from $18.0 billion at 30 June 2019. 


Line of Business Results (Source: Company reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 52.25% of the total shareholding. Dar Al-Handasah Shair and Partners Holdings Ltd. and Jacobs Engineering Group Inc. hold maximum interest in the company at 22.78% and 9.87%, respectively.

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Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

A Quick look at key Margins: For H1FY20, the company reported a gross margin of 6.2% and EBITDA margin of 5.8%. For the same period, the company has an Asset Turnover ratio of 0.61x, higher than pcp. In the last one year, the company’s asset to equity ratio has increased from 1.37x in H1FY19 to 1.88x in H1FY20. 


Key Metrics (Source: Refinitiv, Thomson Reuters)

Covid-19 Update: The company’s projects are progressing across all sectors and regions, despite COVID-19 and oil price decline. However, the impact of COVID-19 has created acute supply chain issues that have slowed some projects. The company’s diversified business has shown resilience in response to COVID-19. In order to manage the impacts of both the COVID-19 pandemic and the decline in oil price, the company is actively taking measures to align the cost base and deliver savings. The company has mobilized an internal COVID-19 pandemic taskforce to actively identify, assess and respond to the challenges presented by the pandemic and to protect the health and wellbeing of its people.

Projects’ Pipeline:

1. Awarded a Service Contract From BASF: On 3^rd July 2020, the company announced that it has been awarded a service contract by BASF for a new battery material plant in Finland, under which, Worley Limited will provide engineering, procurement and construction management services.
 
2. Awarded a contract from SGRE: On 15 June 2020, the company announced that it has been awarded a contract by Siemens Gamesa Renewable Energy (SGRE) for London Array offshore wind farm, in line with its strategy of delivering enhanced operations and maintenance services to the global offshore wind market. This contract also supports the company’s ongoing commitment to the energy transition.
 
3. Alcoa Australia Awards Services Contract To Worley Limited: On 15 June 2020, the company announced that it has been awarded a three-year services contract with Alcoa of Australia Ltd (Alcoa) for Alcoa’s integrated mining, refining and smelting operations, under which, Worley Limited will provide engineering and project delivery services for Alcoa’s site-based sustaining capital program of works. The contract establishes the company as the preferred engineering services provider for baseload works across Alcoa’s Wagerup, Pinjarra and Kwinana alumina refineries, Bunbury port terminal and the Willowdale and Huntly bauxite mining operations in Western Australia.
 
4. Awarded a Service contract by Syncrude Canada Ltd: On 4 June 2020, the company announced that it has been awarded a services agreement by Syncrude Canada Ltd for its Canadian hydrocarbon facilities, under which, Worly Limited will provide construction and site maintenance services at the facilities over a five-year term. 

Key Risks: The markets for the company’s services are exposed to volatile and cyclical commodity prices. The company operates in a highly competitive and dynamic environment which could lead to a loss of market share, and negatively impact the company’s financial performance. The company’s ability to achieve superior shareholders’ returns is substantially influenced by its ability to deliver strategically important projects to its customers’ satisfaction.  

What to expect: The company has the global technical and financial strength to support its Energy, Chemicals and Resources customers as they navigate through the changing world. WOR continues to deliver the benefits of the acquisition of ECR including the realization of cost, margin and revenue synergies. Looking ahead, the company’s energy efficiency and decarbonization of assets are expected to drive operating expenditure.

The company is focused on simplifying its business to support the execution of its strategy to deliver value and to reduce its cost base. The company expects to achieve an operational savings target of $275 million (run rate) by the end of December 2021. These savings are in addition to the $175 million ECR acquisition cost synergy target. The current medium-term picture indicates that the global energy transition will open opportunities across all markets that the company serves.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)


EV/Sales Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Over the last six months, the stock of WOR has declined by 45.7% on ASX and is inclined towards its 52-week low of $4.630, offering an opportunity for accumulation. The financial position of the company has been maintained as cash continues to flow from customers on previously agreed terms. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of lower double-digit upside (in % terms). Considering the company’s recently awarded contracts, decent H1FY20 results, expected benefits from ECR acquisition, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $8.510, down by 2.408% on 08 July 2020. 

 
WOR Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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