Company Overview: 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. WOR operates in 49 countries, including Unites States of America, Australia, New Zealand, China, etc. The company operates in four lines of business: Energy & Chemicals Services; Mining, Minerals & Metals Services; Major Projects & Integrated Solutions; and Advisian.
WOR Details
Long-term Outlook Supported by Cost Saving Programs & Financial Discipline: Worley Limited (ASX: WOR) is a leading global provider of professional project and asset services in the 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 has a diversified business in terms of geography, industry, and service offerings, providing resilience against uncertainties.
During FY20, the company had reported a 75% YoY growth in aggregated revenue and 46% YoY growth in statutory NPATA, mainly driven by the full 12-month contribution of ECR business. WOR’s financial performance in H1FY21 was impacted by the challenging global economic circumstances caused by the COVID-19 pandemic. Notably, WOR has made 14 contract award announcements to date in the calendar year 2021. 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)
The sustainability pivot of WOR provides with the structural framework for growth and positions it at the center of significant investment across its sectors. Notably, the sustainability opportunities in WOR’s factored sales pipeline have a more favorable gross margin percentage compared to its other services. With ECR integrating activities now completed, 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 its diversified business, cost-saving programs, and sustainability pivot, WOR seems well placed for long-term growth.
H1FY21 Results Highlights: During the six months ended 31 December 2020, economic circumstances, including the COVID-19 pandemic, impacted the company’s customers, particularly demand in their end markets. Due to this, the company had to defer some of its projects, mainly in the Americas. WOR reported an underlying EBITA of $207 million in H1FY21, down by 43% on pcp, driven by volume reductions due to deferrals and site access restrictions. Notably, the company’s long-term contracts remained in place and there has been a minimal impact from project cancellations. Underlying NPATA for H1FY21 stood at $117 million, compared to $216 million in H1FY20. Statutory NPAT for H1FY21 stood at $22.3 million. During H1FY21, WOR generated an underlying operating cash flow of $281 million. For H1FY21, the company has paid an interim dividend of 25 cents per share, unfranked.
Gross Profit Trend (Source: Analysis by Kalkine Group)
Key Metrics: Gross margin for H1FY21 stood at 4.6%, down from 6.2% in H1FY20. EBITDA margin for H1FY21 stood at 7.0%, slightly down from 7.2% in H1FY20. Current ratio for H1FY21 stood at 1.00%, down from 1.34% in H1FY20. Debt to equity ratio for H1FY21 stood at 0.38x, down from 0.41x in H1FY20.
Past 5-year Financial Performance for Year Ending 30 June 2020, Debt to Equity Profile; (Source: Analysis by Kalkine Group)
Top 10 Shareholders: The top 10 shareholders together form around 50.25% 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:
(Source: Analysis by Kalkine Group)
Awarded a Services Agreement for USA Refineries: WOR was recently awarded a services agreement by CITGO Refining and Chemicals Company L.P. (CITGO) to provide maintenance, turnaround and sustaining capital services at CITGO’s refineries in Lake Charles, Louisiana and Corpus Christi, Texas. The services will be provided by WOR’s US Field Services team and the term of the agreement is five years.
Awarded a FEED and Cost Estimate Contract: On 3rd May 2021, WOR announced that it has been awarded a front-end engineering design (FEED) services and cost estimate contract by Liquid Wind AB (Liquid Wind) to provide services at Liquid Wind’s renewable methanol facility in Örnsköldsvik, Northern Sweden. The services will be provided by WOR’s Sweden and UK offices with support from Worley’s Global Integrated Delivery team in India.
Awarded an Engineering and Procurement Services Contract: In April 2021, WOR was awarded an engineering and procurement services contract by Chevron U.S.A. Inc. to provide brownfield modification services for one of its deepwater production facilities located in the Gulf of Mexico. In the month of April, WOR was also awarded a front-end engineering services contract by Phillips 66 Company (Phillips 66) to convert its San Francisco refinery in Rodeo, California, USA into a renewable fuels-manufacturing facility.
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 demand risks, as the markets for the company’s services are exposed to volatile and cyclical commodity prices.
Outlook: The company expects an improved EBITA in H2FY21 compared to H1FY21 due to recent project awards as well as the impact of cost reductions implemented in the first half having a full year impact. The company has increased its operational savings target by $75 million to $350 million by June 2022, due to the increased proportion of shared services. WOR’s sustainability pivot continues to provide the structural framework for growth. Notably, the energy transition and circular economy opportunities increased from 11% to 18% of the total factored sales pipeline. 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. The company is progressing its ECR acquisition cost synergies program and operational savings program and expects the benefits of these programs to continue to flow beyond H1FY21.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
Source: 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 6.67%. The stock is currently trading slightly lower than the average 52-week price band of $7.750-$14.01. We have valued the stock using the 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 slight discount to its peer average EV/Sales (NTM trading multiple), considering the continued impact from COVID-scenario, decline in current ratio, softer results in H1FY21, while also taking into account that the company has been trading at a discount in the past 3-years over its peer median. We have taken peers like MMA Offshore Ltd (ASX: MRM), Santos Ltd (ASX: STO), Beach Energy Ltd (ASX: BPT), etc. Considering the company’s diversified business model, recent contract wins, expected cost and revenue synergies, current trading level, modest outlook, and valuation, we give a “Buy” recommendation for the stock at the current price of $10.550, down by 1.770% on 26 May 2021.
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WOR Daily Technical Chart, Data Source: REFINITIV
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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