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Morningstar | No-moat WorleyParsons Meets 1H Expectations on Higher Revenue. No Change to AUD 9.00 FVE.

We make no change to our AUD 9.00 per share fair value estimate for no-moat WorleyParsons or to our fiscal 2019 and 2020 EPS forecasts. We have, however, altered the growth and margin assumptions underlying our estimates following the company’s first-half fiscal 2019 results. Underlying NPAT increased by 26% to AUD 98.4 million, in line with our expectations. But segment margins were generally lower than we’d anticipated, offset by higher than expected revenue growth.

Group first-half revenue grew by 11% to AUD 2.57 billion, with increases of 24% and 5%, respectively, achieved for major projects and services, though with a stubbornly flat outcome for Advisian. Better-than-expected revenue reflects a strong project performance from Norway and increases from services in Canada, UAE/Qatar, and Southeast Asia. It also comes before the Jacobs ECR acquisition which remains on track for late March/April completion and will double WorleyParsons’ earnings.

But margins didn’t get the party invite with revenue. In contrast to fiscal 2018, first-half EBITDA margin for major projects was flat at 10.1%, while services fell to 10.2% from 11.3%. Advisian EBITDA margin increased to 7.5% from 5.2% but accounts for just 10% of group revenue.

We increase assumed five-year revenue CAGR to 18.3% including Jacobs, from our prior 16.9% position. This now targets fiscal 2023 revenue of AUD 11.0 billion versus our prior AUD 10.4 billion forecast. Worley points to continued improvement in market conditions, with resources and energy customers increasing early phase activity for the next cycle of investment. This is reflected in a number of recent contract awards which grew the contract backlog by 3% to AUD 6.6 billion at end December versus June. We haven’t really changed our revenue view, just brought it forward slightly on the strong first half showing.

But there is a trade-off with margins and we reduce our group midcycle EBITDA margin assumption to 8.3% from 8.8% prior.

This is still ahead of first-half fiscal 2019 actual of 7.0%, crediting success on cost-out programs and operating leverage as the business continues to grow. But we’ve become just that little bit more wary given the margin underperformance in the first half.
Our fair value estimate equates to a fiscal 2023 EV/EBITDA of 7.5, and a price/earnings of 12.6, and dividend yield of 4.8%. At today’s fair value, the latter two translate more favourably at 8.0 and 7.5%, respectively. At the current AUD 15.25 share price, we think WorleyParsons screens as materially overvalued. We think that price implies a too-aggressive five-year revenue CAGR of 19% including Jacobs, at an EBITDA margin of 12%. We don’t foresee such a high margin or revenue combination given our less bullish outlook for commodity prices and mining and energy infrastructure spending more generally.
First-half fiscal 2019 operating cash flow halved to a far lower than expected and modest AUD 20.5 million, with unfavourable working capital moves. The balance sheet is currently flush with AUD 2.0 billion net cash in preparation for the imminent AUD 4.6 billion Jacobs purchase. We expect this to reverse to AUD 1.3 billion net debt when the transaction completes, though net debt/EBITDA remaining modest at 1.5 given the almost AUD 1.0 billion being satisfied in WorleyParsons scrip. That modest net debt position is sensible and will be a great outcome immediately proceeding such a large acquisition, courtesy of the recent AUD 2.9 billion capital raising. No net debt should be the long-term aim for a company operating in WorleyParsons’ space and we think this can be achieved by fiscal 2025 while allowing for an assumed 60% payout ratio.

The first-half dividend of AUD 12.5 cents fell below our expectations on a 47% payout and we rein-in our full-year target to AUD 37 cents from AUD 42 cents. That would translate to a modest 2.4% unfranked yield at the current price.