Wood Group gains on energy spending

John Wood Group (WG.) has upgraded its guidance for 2025 and beyond, telling investors the long-awaited fresh cash flow will arrive next year. The engineering and services company saw another significant outflow in 2023, although $265mn (£209mn) was a big improvement on the $704mn outflow in 2022. 

The ongoing hunt for profitability will be boosted by “a higher order book, double-digit growth in our pipeline and positive pricing trends”, said Wood chief executive Ken Gilmartin. The new 2024 outlook is for adjusted Ebitda growth of around 7-9 per cent, and beyond this year Wood said “sustainable” cash flow would lead to “increased flexibility” in capital allocation, flagging the potential for a return of investor payouts. A programme to cut $60mn of costs a year should help this cash generation, although has resulted in the positive free cash coming in 2025 rather than this year because of the immediate cost of $50mn. 

The engineering unit, called 'projects', saw a 5 per cent increase in adjusted cash projects, at $177mn, although at a lower margin than 2022. The equal-largest unit by sales, projects was carried by “strong growth across oil and gas and chemicals” while the mining sector cut spending. The operations unit was also buoyed by oil and gas investment across Europe, the Middle East and Asia-Pacific regions. The cash profit climbed 12 per cent on 2022, with a 0.6 percentage point improvement in margin to 6.7 per cent. Consulting saw a slide in margin, but this remained over 10 per cent. 

The balance sheet still needs work. Net debt climbed from $736mn at the end of 2022 to just over $1bn as of 31 December, although divestments this year should knock this down slightly. Wood’s valuation remains undemanding enough for us at 5.5 times enterprise value (EV) to Ebitda, less than half that of Australian competitor Worley (AU:WOR). Buy. 

Last IC View: Buy, 155p, 22 Aug 2023