Worley Ltd (AS: WOR)
Last Price: AUD$ 14.18 | Fair Value: AUD$ 12.00
Business Strategy & Outlook:
Worley is one of the largest global providers of engineering and professional services to the oil, gas, mining, power, and infrastructure industries, with about 59,000 employees and more than AUD 11.0 billion in annual revenue. Strong relationships with global resource and petrochemical firms, along with solid levels of long-term recurring work, provide some element of switching cost support, a competitive strength. While the traditional engineering, procurement and construction management space is competitive and few firms have the skills and capacity to take on the work available in many of the key areas in which Worley operates. Most contracts are of a cost-plus nature, so the risk from project delays and cost overruns is minimized. The highly skilled, specialist nature of WorleyParsons’ work means it can earn higher margins than traditional engineering and construction firms.
Worley grew rapidly during the past decade, boosted by numerous acquisitions, and is well placed to renew growth in the longer term when economic conditions and energy prices improve. Activity over fiscal 2017 through to 2018 was weak, given project deferrals and lower energy prices. But measured long-term growth is returning. The environmental and infrastructure segment should benefit from long-term demand growth for new power generation assets. Revenue is derived from recurring maintenance-style work under Worley’s “Services” business stream. Contracts include long-term asset management, facility operation and maintenance work. Further, Jacobs ECR’s inclusion delivers enhanced earnings diversification and more consistent earnings with less cyclical capital expenditure, particularly from chemicals. The merged company balances revenue contribution from Worley’s upstream hydrocarbon segment to 39% from a prior 62%. Downstream grew to 20% from 13% and chemicals to 23% from just 6%. Chemicals in particular is a favorably less cyclical segment driven by population and GDP growth. The merged company also enjoys double the U.S. revenue contribution at 33% from 13%, while reduced 21% from 29% Europe, and 10% from 17% ANZ contributions.
Financial Strengths:
First-half fiscal 2022 net operating cash flow declined sharply, down 71% to just AUD 73 million. It reflects reversal of higher-than-average days payable outstanding levels and trade payables at end June 2021, temporary in nature. This saw net debt excluding operating leases rise 12% to AUD 1.4 billion versus levels six months prior, gearing still conservative at 20% but net debt/EBITDA somewhat elevated just above 2. With cash flows to improve from now, the sub-1.0 net debt/EBITDA by fiscal 2024, including an assumption of a 75% dividend payout ratio. Leverage is within management’s target range of 25%-35%. Net debt/EBITDA may look a little elevated, but this reflects the AUD 4.6 billion takeover of Jacobs heading into a pandemic. Worley’s average debt maturity is relatively short at 2.4 years and anticipated long-term debt options will need to be explored. With positive implication for the outlook, Worley’s work backlog increased 6% to AUD 15.1 billion at end December 2021 versus AUD 14.3 billion at end June 2021. The proportion of sustainability contract wins was a higher 11% versus 4% for traditional work, in line with the direction Worley is strategically targeting. Traditional work still represents 75% of the backlog at this stage, but Worley aspires to ultimately flip this ratio in sustainability’s favor.
Bulls Say:
Company Description:
Worley is a leading global provider of professional services, such as engineering, procurement, and construction management, to the oil, gas, mining, power, and infrastructure sectors. Purchase of Jacobs ECR in April 2019 reduced revenue contribution from hydrocarbons to just over 50%, from a prior 75%-80% position. Metals and mining contribute 23% and infrastructure and chemicals the balance. Worley has a global presence with about 59,000 staff in more than 50 countries. It has a strong presence in many developing economies, including Africa.
(Source: Morningstar)
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