Worley Limited

WOR Details

Award of Contract: Worley Limited (ASX: WOR) provides engineering design and project delivery services to the energy, chemicals, and resources sector. The market capitalisation of the company as on 02 March 2021 stood at ~$5.81 billion. As per a recent update, the company was awarded a front end engineering design (FEED) contract by 1PointFive Inc. for its DAC facility to be constructed in the U.S. Permian Basin. The facility will be the first commercial-scale development using Carbon Engineering Limited’s DAC technology, which has the ability to remove carbon dioxide directly from the atmosphere.

H1FY21 Results Update: During the period, the company reported aggregated revenue of ~$4,498 million and an underlying EBITDA of ~$207 million. The underlying operating cash flow stood at ~$281 million in H1FY21. Leverage (Net Debt to EBITDA) was consistent at 1.8x from the June 2020 level. The company has reduced its net debt to $1,206 million, excluding lease liabilities. It has a backlog of $13.5 million as on 31 December 2020, with the long-term contracts in place. The backlogs are set to improve as there is an improvement in the global economic scenario.

H1FY21 Financial Performance (Source: Company Reports)

Key Risks: The Group is exposed to credit risk, liquidity risk and market risk arising from the use of its financial instruments. The onset of the COVID-19 pandemic has had an adverse impact on the company’s performance with reduced volumes and project deferrals and might impact future profitability if there is no improvement in the general economic environment.

Outlook: The company has delivered a total of ~$125 million annualised savings through cost-saving measures in H1FY21, which is expected to flow into H2FY21 and beyond. It has set itself an annualised savings target of ~$190 million by April 2021 from the integration of ECR acquisition. WOR expects its project sanctioning activity to grow in 2021 and forecasts investments to grow at CAGR ~8% through to 2023.

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:  The company has decided to pay an interim dividend of 25 cents per share. As per ASX, the stock of WOR is trading above its average 52-weeks’ levels of $4.63-$14.010. The stock of WOR gave a negative return of 18.92% in the past three months and a positive return of 12.12% in the past six months. On a technical analysis front, the stock of WOR has a support level of ~$10.088 and a resistance level of ~$11.156. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation 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 disruption in business due to the COVID-19 pandemic, lower demand in the end market and deferrals of the project. For the purpose, we have taken peers such as MMA Offshore Limited (ASX: MRM), CIMIC Group Limited (ASX: CIM), Monadelphous Group Limited (ASX: MND), to name a few. Considering the current trading levels, cost-saving measures by the company, synergy from the integration of ECR acquisition and expected improvement in backlogs with improving macro conditions, we recommend a ‘Buy’ rating on the stock at the current market price of $10.54, down by 4.443% as on 02 March 2021.

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

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