Company Overview: Worley Limited (ASX: WOR) is a leading global provider of professional project and asset services in energy, chemicals and resources sectors. It delivers projects and provides engineering, procurement and construction expertise to the upstream, midstream, chemicals, power, and mining and minerals sectors. The company operates in four lines of business: Energy & Chemicals Services; Mining, Minerals & Metals Services; Major Projects & Integrated Solutions; and Advisian. Headquartered in Australia, WOR operates in 49 countries, including Unites States of America, Australia, New Zealand, China, etc.

WOR Details

Financial Growth Backed by 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. The company has a diversified business in terms of geography, industry and service offerings, providing resilience against uncertainties. Despite the uncertainties and challenges caused by the COVID-19 pandemic, the company has reported significantly improved financial performance in FY20 with 75% YoY growth in aggregated revenue and 46% YoY growth in statutory NPATA. This was mainly due to the full 12-month contribution of ECR business. From 2016 to 2020, the company’s aggregated revenue and NPATA grew at a CAGR of 18.39% and 61.55%, respectively.

Five-Year Financial Summary (Source: Company Reports)

Looking ahead, the company is focused on simplifying its business to better support its customers, drive new ways of working and to support the execution of its strategy. The company expects to deliver operational savings of approximately $275 million per annum by 31 December 2021. After successfully integrating with Energy, Chemicals and Resources division of Jacobs Engineering Group Inc (ECR), WOR is on track to deliver substantial cost, margin and revenue synergies. The company is also focused on optimizing its property model, minimizing discretionary spend, increasing its use of shared services and streamlining its organizational structure. With decent cash results, cost savings programs and focus on sustainability, WOR seems well placed for long-term growth.

FY20 Results Highlights: For the year ended 30 June 2020, the company reported aggregated revenue of $11.24 billion, up 75% on FY19 and underlying EBITA of $743 million, up 80% on FY19, mainly due to the full 12-month contribution of ECR. The company reported underlying NPATA of $432 million in FY20, up 66% on the previous year. Due to the company’s increased diversification and increased exposure to its customers’ operational expenditures, WOR delivered a positive operating cash flow of $829 million in FY20, with more consistent earnings. The company has paid a final dividend of 25 cents per fully paid ordinary share, unfranked, taking the total full year dividend to 50 cents per share. At the end of FY20, the company had a gearing of 18.5% with total liquidity of $1,879 million.

FY20 Underlying Results (Source: Company Reports)

Key Metrics: From 2016 to 2020, the company’s gross profit grew at a CAGR of 33.1%. Gross margin for FY20 stood at 6.1% in FY20, compared to 7.3% in FY19. EBITDA margin for FY20 stood at 7.7%, up from 7.2% in FY19. Current ratio for FY20 stood at 1.03x in FY20. Debt to equity ratio stood at 0.39x in FY20.

Growth, Profitability and Liquidity Profiles (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 50.43% of the total shareholding while the top four constitutes the maximum holding. Dar Al-Handasah Shair and Partners Holdings Ltd. and Jacobs Engineering Group Inc. are holding a maximum stake in the company at 22.71% and 9.84%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

CNOOC Awarded a Two-year Contract to Worley Limited: WOR was recently awarded a two-year contract by CNOOC Petroleum Europe Limited (CNOOC Europe) to provide engineering, procurement and construction (EPC) services to CNOOC’s three operated North Sea assets. With the support of Worley’s Global Integrated Delivery team, Worley’s Aberdeen will execute the services, which span the full design lifecycle; from feasibility to commissioning.

Strategic Partnership with Avantium: The company recently entered into a strategic partnership with Avantium Renewable Polymers (Avantium) for the development of its flagship renewable plastic feedstock plant in Delfzijl, The Netherlands, reflecting the company’s strategic pivot to sustainability and delivering a more sustainable world. WOR and Avantium have also agreed to collaborate in the execution phase of Avantium’s licensing strategy.

Four Master Services Agreements by Cheniere Energy: Cheniere Energy, Inc. has awarded four master services agreements to Worley Limited to provide project delivery services to Cheniere’s Corpus Christi Liquefaction and Sabine Pass Liquefaction facilities in Texas and Louisiana respectively.

MSD Animal Health Awarded Procurement and Construction Contract: Schering-Plough Animal Health Limited, trading as MSD Animal Health, has awarded a procurement and construction contract to Worley Limited, under which, the company will provide services to upgrade its animal vaccine plant in Upper Hutt, New Zealand.

Key Risks: The company operates in a highly competitive and dynamic environment which could impact the company’s financial performance. Further, the company is exposed to the risks and uncertainties caused by the COVID-19 pandemic. WOR is also exposed to the demand risks, as the markets for the company’s services are exposed to volatile and cyclical commodity prices.

Outlook: WOR is planning to release its H1FY21 results on 23 February 2021. In an update provided on 1 February 2021, the company announced that its aggregated revenue for H1FY21 is expected to be in the range of $4.4 to $4.5 billion. Further, underlying EBITA for the period is expected to be in the range of $200 to $210 million. WOR expect statutory operating cash flow to be in the range of $250 to $255 million. The company also informed that its net debt has been reduced approximately $1.2 billion excluding lease liabilities, the lowest level of net debt since the ECR acquisition.

Although the COVID-19 pandemic has impacted the demand in WOR’s end markets, the company has continued to generate decent operating cash flow and has strengthened its liquidity position. It is progressing its ECR acquisition cost synergies program and operational savings program and expects the benefits of these programs to continue to flow beyond HY2021. The company expects to deliver increased ECR acquisition cost synergy target of $190 million per annum by April 2021, as well as additional operational savings of $275 million per annum by December 2021. WOR expects an improved EBITDA in H2FY21, compared to H1FY21, which will be further supported as COVID-19 related economic circumstances improve.

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

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock of WOR has corrected by 9.64%. The stock has a 52-week low and high of $4.63 and $14.50. On the technical analysis front, the stock has a support level of ~$9.63 and resistance of ~$12.99. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe the company can trade at a discount to its peer average EV/Sales (NTM Trading multiple), considering the continued impact from COVID-scenario, low ROE, low current ratio, while also taking into account the that the company has been trading at a discount in the past 3-years over its peer median.  We have taken peers like Downer EDI Ltd (ASX: DOW), Monadelphous Group Ltd (ASX: MND), Beach Energy Ltd (ASX: BPT), etc. Considering the company’s diversified business model, its decent financial performance in FY20, expected cost and revenue synergies, outlook and valuation, we give a “Buy” recommendation for the stock at the current price of $10.71, as on 17 February 2021.

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

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