Company Overview: Worley Limited (ASX: WOR) is a leading global provider of professional project and asset services in the energy, chemicals and resources sectors. Due to the company’s range of services and the scope of its expertise, WOR has been able to work with its customers at every stage of their project: from initial concepts to sustaining and enhancing their assets. The company operates through four lines of business: Energy & Chemicals Services, Mining, Minerals & Metals Services, Advisian and Major Projects & Integrated Solutions including construction and fabrication yard activity.

WOR Details

Improvement in Top-line and 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. The company has a diverse business in terms of geography, industry, and service offerings. The company recently introduced a transformation strategy that focuses on enhancing its leadership position in energy, chemicals and resources space, and change the way it works by leveraging automation and the use of digital products. Over the last five years, the company has witnessed significant improvement in its top-line as well as the bottom-line. From 2016 to 2020, the company’s aggregate revenue and NPATA have increased at CAGR of 18.39% and 61.55%, respectively.

Snapshot of Past Financial Performance (Source: Company Reports)

Amid Covid-19 pandemic, the company continued to deliver projects and provide services to support its customers with most of its office-based people working from home. In response to the pandemic, the company took a range of measures to maintain its financial and operational integrity and strengthened its liquidity position by extending existing and securing additional facilities. Following the completion of ECR acquisition last year, the company has become more diversified across different geographies and sectors. This diversification has provided resilience during the period of global disruption caused by the COVID-19 pandemic and has helped the company in providing improved financial performance in FY20. The company is on track to deliver the $190 million ECR acquisition cost synergy target as well as the $275 million operational savings target as it accelerates its transformation. In FY21, the company will continue to prioritise protecting its people, maintaining financial and operational integrity and supporting its customers, to create value for all its shareholders.

FY20 Results Highlights: One of the important highlights of FY20 is the successful integration of the ECR business, which helped the company in delivering cost and revenue synergies beyond expectations. The 12-month contribution of ECR has allowed the company to achieve growth in its FY20 revenue, EBITA and NPATA.

For FY20, the company reported total aggregate revenue of $11,249, up 75% on the previous year. Further, the company reported an underlying net profit after tax of $432 million, up 66% FY19. During the year, the company delivered a positive operating cash flow of $829 million, with more consistent earnings due to the company’s increased diversification and increased exposure to its customers’ operational expenditures.

FY20 Results Snapshot (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 51.43% 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.

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 entered the COVID-19 period in a stable financial position. Throughout the pandemic, the company continued to deliver projects and provide services to support its customers. To deal with the uncertainties, the company improved its financial position by delivering a strong cash result and securing debt facilities. 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.

Key Latest Updates:

• Strategic Alliance with Haldor Topsoe: On 20 August 2020, the company announced that it has established a strategic alliance with Haldor Topsoe A/S to provide sulphur technology and specialist services for the removal and recovery of sulphur using acid recycle streams.

• Awarded a Master Construction Services Agreement: On 7 August 2020, the company announced that it has been awarded a master construction services agreement (MCSA) by Corpus Christi Liquefaction  LLC, under which, Worley Limited will provide civil, structural, mechanical, instrument and electrical, HVAC and  marine construction services at Cheniere’s Corpus Christi liquified natural gas (LNG), liquefaction facility.

• Framework Agreements for BP’s Downstream Business Line: On 7 August 2020, BP America, Inc and BP International Limited, entered into separate framework agreements with Worley Limited, under which, WOR will provide services to BP’s downstream business line for three years. This award strengthens WOR’s position in supporting the global operating assets of its customers.

• Increases Stake in TW Power Services to 100%: On 9 July 2020, the company announced that it has acquired Ferrovial’s 50% shareholding of TW Power Services Pty Ltd (TWPS) for a cash consideration of $20 million, taking the total stake to 100%. This acquisition is expected to contribute to the company’s global Power business, and it will help in expanding the company’s established O&M expertise.

• 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.

Key Risks: The COVID-19 pandemic has resulted in a rapidly changing environment for Worley's business. It has created supply chain issues that have slowed some projects. The company’s ability to achieve superior shareholder returns is substantially influenced by its ability to deliver strategically important projects to its customers’ satisfaction.  The markets for the company’s services are exposed to volatile and cyclical commodity prices. It is worth noting that the demand uncertainty following the COVID-19 pandemic has given rise to volatility in commodity pricing. 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.

What to Expect: Although the demand in the market has reduced due to COVID-19, the company expects the market to rebalance in response to supply cuts and returning economic activity. The company’s diversification, particularly given its presence in North America, will continue to be important as different sectors and regions recover at different rates. Further, the long-term picture continues to indicate the global energy transition will open opportunities across all markets that the company serves.

The company is currently focused on protecting its people, maintaining financial and operational integrity and supporting its customers to create value for all its shareholders. WOR continues to deliver the benefits of the acquisition of ECR, including the realization of cost, margin and revenue synergies. The company is on track to deliver the $190 million ECR acquisition cost synergy target as well as the $275 million operational savings target as it accelerates its transformation. In-line with its transformation strategy, the company intends to consider its balance sheet capacity for high-return opportunities. With its global scale, combined with the technical and financial strength, WOR is well placed to support its Energy, Chemicals and Resources customers as they navigate a changing world.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E 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 corrected by 33.06% on ASX and is trading below the average of 52-week trading range, offering an opportunity for accumulation. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and have arrived at a target price with lower double-digit upside (in % terms). For the purpose, we have taken peers like Ampol Ltd (ASX: ALD), Cooper Energy Ltd (ASX: COE), and Senex Energy Ltd (ASX: SXY). Considering the company’s recently awarded contracts, its decent FY20 results, expected benefits from ECR acquisition, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $9.690, up 6.367% on 26 August 2020.

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

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