Company Overview: Worley Limited (ASX: WOR) is mainly involved in providing professional project and asset services to multi-national and regional energy, resources and chemicals companies. WOR provides project delivery and technical expertise to its customers and helps them in achieving success. The company generates revenue by charging for their time spent performing professional and field-based services. The company operates four lines of business- Energy & Chemicals Services, Mining, Minerals & Metals Services, Advisian and Major Projects & Integrated Solutions.

WOR Details

Diversified Business Model: Worley Limited (ASX: WOR) is a leading global professional services company that provides engineering design and project delivery services to multi-national energy, resources and chemicals companies as well as more regionally and locally focused companies. Following the acquisition of Jacobs Energy, Chemicals and Resources Division (ECR) in April 2019, WOR has become more diversified in terms of geography, industry and service offerings. In order to further enhance its leadership position in energy, chemicals and resources sector, the company has introduced a transformation strategy that is focused on supporting its customers through the energy transition, using automation and digital products to support the digitalization, and using engagement models to deliver more efficient outcomes. Over the last five years, the company has witnessed significant improvement in its top-line and bottom-line with CAGR of 18.39% and 61.55%, respectively.

5-Year Financial Summary (Source: Company Reports)

Due to the ongoing COVID-19 pandemic, the company has accelerated its transformation and has taken actions to re-position the business. In response to the pandemic, the company has implemented 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 ECR acquisition, the company’s business is now more diversified from both a geographic and sector standpoint, establishing it well-positioned to navigate through COVID-19 pandemic. Further, the company is on track to deliver the cost synergy target of a $190 million run rate by April 2021. Looking ahead, the company is focused on optimising its property model, minimising discretionary spend, increasing its use of shared services and streamlining its organisational structure.

FY20 Results Highlights: For the year ended 30 June 2020 or FY20, the company total aggregate revenue of $11,249 million, up 75% on the previous year, driven by the full 12-month contribution of ECR in FY2020. 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. One of the major highlights of FY20 is the successful integration of the ECR business, which helped the company in delivering cost and revenue synergies beyond expectations.

For Energy & Chemicals Services business, the company reported aggregate revenue of $4,952 million in FY20, up 75% on the previous year, reflecting the higher relative contribution from Chemicals customers as well as synergy realization. The aggregate revenue for Mining, Minerals & Metals Services, increased by 314% in FY20 to $1,184 million. The aggregate revenue for Major Projects & Integrated Solutions increased by 65% in FY20 to $4,540 million, driven by the 12-month contribution of ECR and growth in the Cord and Norway businesses.

The company has declared an interim dividend of 25 cents per fully paid ordinary share, unfranked, taking the total FY20 dividend to 50 cents per share, representing an increase of 82% on the previous year. During the year, the company strengthened its liquidity position by renewing $480 million of working capital for an additional 12 months and securing an additional $465 million in 12-month facilities. At the end of FY20, the company had a gearing of 18.5% with total liquidity of $1,879 million.

FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form 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 FY20, the company’s gross margin and net margin stood at 6.1% and 1.4%, respectively. For the same period, EBITDA margin stood at 7.7%, higher than 7.2% in FY19. The company’s debt to equity multiple stood at 0.39x in FY20, compared to 0.36x in FY19.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Change of Directors’ Interest: Recently, the company disclosed that one of its Director Juan Jose Suarez Coppel who had an indirect interest in the company had acquired 2000 ordinary shares for a total consideration of $19,160 via on-market trade.

COVID-19 Update: The COVID-19 pandemic has resulted in a rapidly changing environment for WOR business. It has created supply chain issues that have slowed some projects. 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 well being of its people.

• Services contract Awarded by Brax: The company was recently awarded a service contract by Drax Power Limited for cabon capture units at UK station. As per the terms of the contact, WOR will be involved in the development of plant layout, cost estimation and schedules for FEED, detailed engineering, procurement and construction and it will help DRAX in achieving its goal of becoming a world-leading, carbon-negative company by 2030.
• Strategic Alliance with Haldor Topsoe: On 20 August 2020, WOR 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.
• 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, WOR will provide civil, structural, mechanical, instrument and electrical, HVAC and  marine construction services at Cheniere’s Corpus Christi liquified natural gas (LNG), liquefaction facility.
• Two Framework Agreements With BP: On 7 August 2020, the company informed BP America, Inc and BP International Limited entered into two separate framework agreements with Worley to provide services to BP’s downstream business line for three years period.

Outlook: In the current scenario, there are various forces like energy transition, climate change, digitisation, etc., which are changing the markets in which WOR operates and shaping how its customers position their roles in the energy, chemicals and resources industry. In the long-run, the ongoing energy transition, and the digitalisation of industries are expected to open opportunities for the company across all the sectors it serves. Further, the company is advancing with its transformation strategy to enhance its leadership position in the energy, chemicals and resources sector.

In FY21, the company is focused on protecting its people from ongoing COVID-19 pandemic and maintaining financial and operational integrity to create value for all its shareholders. WOR 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. With its diversified business, global scale and the technical and financial strength, WOR is well placed to navigate through the changing world. The company is going to hold its virtual Annual General Meeting (AGM) on 23 October 2020.

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 and three months, the company has provided a return of 67.45% and 19.09%. The stock is currently trading slightly below the average 52-week’s price band. On the technical analysis front, the stock has a support level of ~$8.5 and resistance of ~$10.6. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and have arrived at a target price of low 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 diversified business, its decent FY20 performance, and expected cost synergies and benefits from ECR acquisition, we give a “Buy” recommendation on the stock at the market price of $9.550, down by 4.309% on 30 September 2020.

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

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