- Revenues down, but margins up
- New business at the operations segment
John Wood Group (WG.) delivered a mixed first-quarter trading update a day after it rebuffed a prospective £1.42bn takeover approach from Sidara, a Dubai-based engineering and consulting group.
Group revenues were down by 6 per cent to $1.36bn (£1.08bn) in the period – a reflection of reduced project work, with weakness in the minerals market the main culprit. The top line suffered due to lower pass-through revenue and the roll-off of engineering, procurement and construction work. These are likely to be temporary effects, and it’s worth noting that margins at the projects division were heading in the right direction due to a favourable business mix.
It was certainly a positive quarter for the operations segment. Revenue was up 5 per cent to $624mn, with “higher activity levels across Europe and the Middle East”. Margins benefited from the strategic shift towards higher-value services. This is important to consider as the orthodox view of oil services is that operational work at production sites generally delivers lower margins than project development work. Yet the group delivered improvements across all its business units, leading to a 4 per cent increase in the adjusted group cash margin.
Aside from improvements to marginal profitability, there were positive new business developments. The operations segment inked a new decarbonisation contract with TotalEnergies (FR:TTE) for flare gas recovery in the UK North Sea, together with a contract to deliver maintenance and modifications for Equinor (NO:EQNR) in Brazil.
Financial performance – and cash flows – will be weighted towards the second half of the year and the group still expects “high single-digit growth” in adjusted cash profits before the impact of disposals. The outlook for 2025 is brighter still, with cash profit growth likely to exceed management’s medium-term target, while annualised benefits of around $60mn are expected from the group’s “simplification programme”. These improvements should be borne out in fast-rising free cash flow – a point that obviously hasn’t gone unnoticed by family-owned Sidara.
Last IC view: Buy, 142p, 26 Mar 2024
