Wood Group ups guidance after positive first half

The company, which operates across the energy, mining and renewables sectors, specifically highlighted hydrogen and carbon capture projects as ramping up this year. Its order book of $6bn represents a 5 per cent increase since the end of December but a 4 per cent drop on a year ago, at constant currency rates. 

Profitability remains a challenge, though – Wood's adjusted Ebitda margin for the half-year slipped from 7.2 per cent to 6.8 per cent due to higher operational spending and “increased low-margin pass-through revenue”. Operating profit was also weak, at just $23mn, and the company reported a cash outflow. Beyond the share price spike it caused earlier in the year, Apollo Global Management's (US:APO) aborted buyout bid also resulted in $5mn spent on the Wood side. 

Its long-promised move to positive free cash flow is on track, however. Chief executive Ken Gilmartin told the IC he saw this interim period as a “clear inflection point”. “Some of the swings and roundabouts and ups and downs we’ve seen in the past are going to normalise,” he said, and current project bids should result in higher profit margins for the group.

The group has not paid a dividend since 2019, and Gilmartin said payouts would return when there is sustainable free cash flow, which we would take to mean three half-year periods in a row. Investec analyst Alex Smith is slightly more optimistic, and has pencilled in a payout of 3¢ a share in 2024.

This is a big ship to turn around (with more than 30,000 workers on the books) but we think the cheap valuation and its presence in growing markets is enough to maintain our positive call on Wood. Buy. 

Last IC View: Buy, 140p, 1 June 2023