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Market calls Wood Group rebound

Shares in the oil services group jumped on promises of higher merger cost synergies
August 22, 2018

At the start of August, citing an “increasingly robust” funding market for offshore projects, analysts at Canaccord Genuity named Wood Group (WG.) as a top pick in the “attractively placed” oilfield services sector. The shares, argued the bank, had unduly lagged the past year’s rally in Brent crude.

IC TIP: Hold at 700p

After a slower-than-expected turnaround in the contract pipeline, and a somewhat defensive merger with Amec Foster Wheeler, the market can hardly be blamed for wanting evidence before buying into the resurgence. Then again, the reaction to Wood’s interim results suggested the market wasn’t asking for hard evidence, and would settle for any sign of improved sentiment.

Indeed, compared with pro-forma figures for 2017, half-year numbers didn’t scream “turnaround”. The top line rose 13 per cent, while total earnings before interest, tax and amortisation actually fell slightly, reducing the margin by 80 basis points to 4.8 per cent. Those figures exclude exceptional charges related to the Amec merger, and an impairment to turbine services subsidiary EthosEnergy, which together help to explain the statutory loss for the period.

But the stock shot up 6 per cent in early trading nonetheless, as chief executive Robin Watson flagged “higher activity”, and “good prospects and improving conditions across energy and industrial markets” in 2019.

It’s not just the oil and gas market, which comprises some 60 per cent of Wood’s revenue, where clients are once again picking up the phone. The company spies good growth indicators for its power division, and remains “optimistic on activity in solar projects”. This hasn’t translated into enhanced full-year guidance, although the combined order book now stands at $10.6bn (£8.24bn) – around 40 per cent of which will be completed in the second half of 2018.

Moreover, self-help continues to be the star attraction of the investment case. Integration of the Amec deal is “ahead of schedule”, and a three-year cost synergy target has been raised from $170m to at least $210m, while annualised revenue synergies have already added more than $400m to the top line.

Bloomberg consensus forecasts are for full-year adjusted pre-tax profits of $377m and EPS of 54¢, rising to $503m and 70¢ in 2019.

WOOD GROUP (WG.)   
ORD PRICE:700pMARKET VALUE:£ 4.75bn
TOUCH:700-701p12-MONTH HIGH:754pLOW: 515p
DIVIDEND YIELD:3.8%PE RATIO:N/A
NET ASSET VALUE:715¢*NET DEBT:33%^
Half-year to 30 JunTurnover ($bn)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
20171.9413.51.111.1
20184.92-25.3-7.911.3
% change+153--+2
Ex-div:30 Aug   
Payment:27 Sep   
£1=$1.28. Includes intangible assets of $6.77bn, or 999¢ a share. ^Excludes joint ventures.