Company Overview: Worley Limited, formerly WorleyParsons Limited, is a professional services business company. The principal activities of the Company consist of providing engineering design and project delivery services, including providing maintenance, support services and advisory services to sectors, which include hydrocarbons; minerals, metals and chemicals, and infrastructure. Its segments include Advisian, Energy and Chemical Services, Mining, Minerals & Metals Services and Major Projects and Integrated Solutions. It offers a range of services from small studies to the delivery of mega projects. Its OneWay is an integrity management framework. Its EcoNomics is a framework, which includes Sustainable Decisions, Sustainable Project Delivery and Sustainable Operations. It serves multi-national oil and gas, resources and chemicals companies, as well as regionally and locally focused companies, national oil companies and government owned utilities.
 

WOR Details
 
Synergistic acquisition and recent contracts win to drive overall growth: Worley Limited (ASX: WOR) provides engineering, construction and procurement services, and offers a wide range of consulting and advisory services. It provides full lifecycle, from creating new assets to sustaining and enhancing operating assets to infrastructure, power, chemicals, metals, mineral, mining and hydrocarbon sectors. Net income over the period of FY15-19 witnessed a remarkable pattern of growth, wherein the company reported a loss of $54.9 Mn in FY15 and thereafter climbed a consistent growth path with net profit at $151.9 Mn in FY19.

Joint Venture between WOR and Ranhill Group Sdn Bhd, known as Perunding Ranhill Worley Sdn Bhd, has won a 5-year engineering, procurement and construction management (EPCM) contract by ExxonMobil Exploration and Production Malaysia Inc., marks a decade of partnership between them. Through this contract, WOR is expected to bring its project delivery system that developed in Worley’s UK North Sea business. Moreover, its contract with Nuclear Power Plants Authority (NPPA) of the Arab Republic of Egypt is expected to extend until the end of 2030, where WOR will help Egypt to develop its nuclear industry to meet the world’s changing energy needs. In another contract, the company will be working with Marathon to enable it to achieve its renewable fuel goals and meet the challenges of the global energy transition. The company expects to deliver the benefits of the acquisition of ECR in the ongoing financial year 2020, which would include the realization of cost, margin and revenue synergies. Other important factors such as population increase and growth in underdeveloped nations are expected to drive energy demand in the coming decade, helping the energy producers and associated companies in delivering better returns to their shareholders. Hence, we expect that the company has a decent outlook in the long run on the back of diversified business model, operational excellence, synergistic acquisition with ECR, and recent contract wins.
 

Historical Performance Data (Source: Company Reports)

FY19 Key Highlights for the period ended June 30, 2019: Group’s aggregated revenue grew to $6,439.1 million, an increase of 35.6% on prior corresponding period. This can be attributed to the increase in Backlog across all sectors with a strong increase in the Americas, largely on the back of the ECR acquisition. Underlying net profit after tax (excluding the post-tax impact of amortization on intangible assets acquired through business combinations) increased by 43% to $259.8 million as compared to the previous year. Operating cash flow for the period was reported at $236.3 million. The Board of Directors declared a final dividend (unfranked) payment of 15.0 cents per fully paid ordinary share, in addition to the interim dividend of 12.5 cps taking the total dividend to 27.5 cps for the full year.


FY19 Income Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 51.36% of the total shareholding. Dar Al-Handasah Shair and Partners Holdings Ltd. and Jacobs Engineering Group Inc. hold maximum interest in the company at 22.78% and 9.87%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

A Quick Look at Key Metrics: Its gross margin for FY19 stood at 8.0%, better than the result in FY18 at 7.9%. Its debt to equity ratio for FY19 stood at 0.36x, lower than the result in FY18 at 0.45x, which implies that the company is deleveraging its balance sheet and generating enough cash to fuel its operations.


Key Metrics (Source: Thomson Reuters)

JV Unit Ranhill Worley Awarded 5-Yr Contract from ExxonMobil: In an update on January 6, 2020, WOR highlighted that a Joint Venture unit of Worley group and Ranhill Group Sdn Bhd, Perunding Ranhill Worley Sdn Bhd has been awarded a 5-year engineering, procurement and construction management (EPCM) contract by ExxonMobil Exploration and Production Malaysia Inc. As per the contract, the JV is expected to deliver brownfield asset restoration and debottlenecking projects for offshore projects in Malaysia. The EPCM services are also expected to include offshore field engineering services along with workpack preparation, material management, construction planning/reporting for offshore assets of ExxonMobil Exploration and Production Malaysia Inc.

Extension of Contract Between WOR & NPPA till 2030: On December 30, 2019, the company announced that it has been awarded a consultation services contract for the first Egyptian nuclear power plant from The Nuclear Power Plants Authority (NPPA) of the Arab Republic of Egypt. Under this contract, the company is expected to provide consultation services to NPPA to support the implementation of the nuclear power plant project comprising four pressurized water reactors with a nameplate capacity of 4800 MW at El Dabaa, Mediterranean coast, west of Alexandria. The contract also includes the technical support to NPPA in engineering and design review, project management, procurement, construction management, training, procedure development, quality assurance, commissioning and related activities. This contract extends the relationship between WOR and NPPA until the end of 2030.

Additional 5-Yr Contract Term from Imperial & Syncrude: On December 20, 2019, WOR received an extension of engineering and procurement services contract from Imperial Oil Limited (Imperial) and Syncrude Canada Limited (Syncrude) for an additional term of five years. Its relationship with Imperial and Syncrude lasts from 1991, and the company is expected to provide a full range of engineering, procurement and project delivery services for brownfield and greenfield projects in Canada. Worley’s Canadian team will be supported by its global business, including Worley’s Global Integrated Delivery office in India, in executing the project.

WOR to provide Engineering Services to Marathon Petroleum: In another announcement on December 30, 2019, the company highlighted that it received a contract from Marathon Petroleum Company LP to provide detailed engineering services for the conversion of the Dickinson refinery, located in North Dakota, to a renewable diesel refinery. Under the contract, WOR will provide engineering services and procure equipment and materials for the refinery, which is being converted from a crude oil feedstock to an organically derived oil feedstock, making it a 100% renewable diesel operation. Worley’s offices in the USA, supported by its global business will be executing the project.
Appointment of CEO & MD-On February 3, 2020, the company informed the market that following the retirement of Andrew Wood, Chris Ashton has been appointed as the Chief Executive Officer (CEO) and Managing Director of WOR, with effect from 24 February 2020. WOR witnessed transformation into a global company under Andrew Wood. Under his leadership, the company successfully restructured and realigned its operations through a period of rapid change in the markets it serves and then doubled the size of the business through the acquisition of the Energy, Chemicals and Resources (ECR) division of Jacobs to create the global leader across Worley’s core market segments. His successor Chris Ashton held many leadership roles in the company such as Chief Operating Officer (COO) and was responsible for the integration of ECR and for strategy for the transformed Worley business. He has also held executive roles with responsibility for African, Europe and Middle East operations, and the Power sector globally.

Energy Outlook: Demand for energy, chemicals and resources continues to increase. An opportunity is arising from the rapidly changing energy mix and climate adaption challenge across the global markets. However, the potential impact of rising macro-economic concerns such as trade war between the USA and China, Brexit, USA-Iran issue, on the energy sector is difficult to gauge, but the long-term outlook for energy looks stable with the growing power needs and investments in technologies in harnessing renewable energy sources.

Key Risks: The company is susceptible to certain risks such as risks associated with health, safety and environmental risk, operating risks (i.e. contract management risk, demand risk, project delivery risk, cybersecurity risk), reputation risk, financial risks (liquidity risk, internal reporting risk, taxation risk) strategic risks (integration risk, climate risk), etc.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

EV/Sales Multiple Based Relative Valuation (Source: Thomson Reuters)

 Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Technical Analysis:
Monthly Chart:

Monthly Chart (Source: Thomson Reuters)

Weekly Chart:

Weekly Chart (Source: Thomson Reuters)

The stock appears to be in a consolidation phase in both the monthly and weekly charts. However, on weekly chart, previous week candle formed a famous “Hammer” pattern on 50 EMA and 200 EMA, which supports the probability for an uptrend movement for the short-to-medium term. The stock is expected to test the resistance level of ~$17.373 (Fibonacci Projection of 38.2%), break-on which the next challenge may appear on the level close to ~$19.408 (Fibonacci Projection of 50%).

Note: EMA – Exponential Moving Average
 
Stock Recommendation: WOR’s stock posted a 1-year return of 1.70%, and in the span of six months the stock generated a return of 2.64%. It is currently trading above the average of 52-week high and low price of $16.450 and $11.710, respectively. Considering the company’s business model, FY19 performance, profitability margins, recent updates & contracts, outlook provided, and current trading level, we have valued the stock using a relative valuation method, i.e., EV/Sales multiple, and arrived at a double-digit growth (in % terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $14.50, up 0.764% on February 12, 2020.

 
WOR Daily Price Chart (Source: Thomson Reuters)

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