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John Wood faring better than expected

Oil-services engineer John Wood has delivered a wholly unremarkable interim management statement - which is just what the doctor ordered
May 21, 2014

What's new:

• Better than expected trading

• Finalisation of Siemens joint venture

• Upgrade contract with National Grid

IC TIP: Hold at 742p

Normally, an in-line trading update would elicit little excitement, but shareholders in John Wood Group (WG.) will take satisfaction from the group's steady performance in the early part of this year after the brace of profit warnings issued in 2013.

Management laid most of the group's problems at the door of Wood Group Engineering. Yet performance within this division has been slightly ahead of expectations, due to a step-up in subsea work. It's too early to say if this will have any effect on full-year earnings guidance for the division, but management has dropped its former talk of a 15 per cent decline.

Offshore activity has been maintained in the Gulf of Mexico, where upstream capital spending continues apace, and demand linked to North Sea maintenance has also been robust. The financial performance of the group's turbine joint ventures was hit by delays on the Israeli Dorad contract, but this is expected to be recovered over the remainder of this year. One of these ventures, with Siemens, was finalised earlier this month: the two have joined forces to deliver gas-turbine services under the banner EthosEnergy. The unit has just won a $3.2m (£1.9m) contract to upgrade nine Rolls-Royce (RR) turbines for National Grid (NG).

Investec says...

Add. An unspectacular, yet reassuring, update from Wood Group doesn't warrant forecast upgrades, but the improved clarity on earnings is welcome. We are adjusting our target earnings multiple from a 5 per cent discount to the sector to parity, lifting the target price by 30p to 825p. The flagged slowdown at Wood Group Engineering reflects a renewed focus by oil and gas companies on cutting capital expenditure. As a result, the group is contracting more early-design work for rigs, but remains well-placed to win larger contracts in due course. Expect adjusted EPS of 104¢ this year.

Deutsche Bank says...

Hold. The group's core businesses have outstripped expectations due to a step-up in US shale activity, combined with continuing strong demand for North Sea maintenance work. As a dollar-reporting business with substantive revenue streams from the UK continental shelf, Wood Group's PSN unit should also benefit from sterling's relative strength. The visibility of orders is such that consensus estimates for 2014 - currently factoring in profit growth of about 3-4 per cent - are unlikely to change much. It's also too early to predict any upside to 2015 estimates.