Worley Limited

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. 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 the Unites States of America, Australia, New Zealand, China, etc.

WOR Details

Decent Growth Potential Backed by Diversified Business Model: Worley Limited (ASX: WOR) is a leading global provider of professional project and asset services in the energy, chemicals and resources sectors. The company has a diversified business in terms of geography, industry and service offerings, providing resilience against uncertainties. The company is currently fast-tracking on its transformation strategy which focuses on enhancing its leadership position in the energy, chemicals and resources sector by 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. From 2016 to 2020, the company’s aggregated revenue and NPATA grew at a CAGR of 18.39% and 61.55%, respectively.

5-Year Financial Summary (Source: Company Reports)

Amid COVID-19 pandemic, the company has 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 has strengthened its liquidity position by extending existing and securing additional facilities. 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. 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. With its global scale, as well as the technical and financial strength, WOR seems to be well placed to support its energy, chemicals and resources customers.

FY20 Results Highlights: During FY20, the company’s aggregated revenue grew to $11.24 billion, up 75% on the previous year and underlying EBITA was up 80% to $743 million, mainly driven by the full 12-month contribution of ECR.  For FY20, the company posted underlying NPATA of $432 million, 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’s underlying EBITDA margin grew by 0.2 percentage points to 6.6% in FY20, reflecting the higher relative contribution from Chemicals as well as synergy realization.

During the year, the company completed two transactions to grow its capabilities in renewable and distributed energy. WOR acquired 3sun to deliver installation, inspection and maintenance expertise in the offshore wind sector. And it formed a joint venture with XENDEE called VECKTA: a distributed energy system, microgrids and storage business. 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)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 50.51% of the total shareholding. Dar Al-Handasah Shair and Partners Holdings Ltd and Jacobs Engineering Group Inc. hold maximum interest in the company at 22.71% and 9.84%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

A Quick Look at Key Margins: For FY20, the company’s net margin stood at 6.1% and 1.4%, respectively. Further, the company’s EBITDA margin stood at 7.7% in FY20, higher than 7.2% in FY19. The company’s debt to equity multiple stood at 0.39x in FY20 as compared to 0.36x in FY19.

Key Metrics: (Source: Refinitiv, Thomson Reuters)

Class Action Dismissed by Court: On 22 October 2020, Federal Court delivered a favourable judgment in class action proceedings, wherein it dismissed the shareholder class action, causing WOR to win the case. Federal Court also decided that costs will be awarded in Worley’s favour.

Strengthens Liquidity Position: On 19 October 2020, Worley Limited announced that it has been confirmed as an eligible issuer for the Bank of England COVID Corporate Financing Facility (CCFF) for a £300 million (~A$540 million) commercial paper programme. This has increased the company’s liquidity position and further strengthened its balance sheet.

Latest Contract Wins:

• Licensing Agreement Awarded by BASF: BASF SE (BASF) recently awarded Worley Limited a framework licensing agreement under which, WOR’s gas treating and sulphur technology business, Comprimo® will become an authorized licensor of BASF’s technology solvent suite, OASE®.
• Awarded a Services Contract by Drax: On 21 September 2020, the company announced that Drax Power Limited has awarded it a services contract for first two carbon capture units at UK power station which will be integrated into the biomass power generating units that have a total capacity of 2,580 MW. As per the terms of the contract, WOR will be involved in the development of plant layout, cost estimation and schedules for FEED front-end engineering and design), detailed engineering, procurement and construction.
• 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 announced that BP America, Inc and BP International Limited have each entered into separate framework agreements with Worley Limited, under which, WOR will provide services to BP’s downstream business line for three years.
  

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.

What to expect: Amid the challenging working environment, WOR is focused on protecting its people, maintaining financial and operational integrity and supporting its customers, to create value for all its shareholders.  The current economic circumstances have given WOR an opportunity to fast-track its transformation which will enhance its leadership in position in energy, chemicals and resources sector. The company is on track to deliver an increased ECR acquisition cost synergy target of $190 million per annum by April 2021. Further, the company is expected to deliver additional operational savings of $275 million per annum by December 2021 as it accelerates its transformation. In the long run, the energy transition, and the digitalization of industries is expected to open opportunities across all the sectors in which the company operates. With diversified business, strengthened liquidity position, and technical and financial strength, WOR is well placed to navigate through the 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 three months, the stock of WOR has provided a return of 15.0% and is trading lower than the average 52-weeks price level band, offering investors a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$7.72 and resistance of ~$10.78. 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 Downer EDI Ltd (ASX: DOW), Santos Ltd (ASX: STO), Monadelphous Group Ltd (ASX: MND), etc. Considering the company’s diversified business, decent financial performance in FY20, expected cost and revenue synergies, current trading levels, and valuation, we give a “Buy” recommendation on the stock at the current price of $9.480, down by 2.77% on 4 November 2020.

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

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