An opportunity with sustainability growth
Worley Limited (ASX:WOR) is a leading global provider of professional project and asset services in the energy, chemicals, and resources sectors. While Hydrocarbons (energy) remains its biggest end market, the $4.6bn acquisition of Jacobs ECR in 2018 reduces hydrocarbons exposure to around 50% of revenues while Chemicals (historically a lower volatility business given more stable customer operational expenditure) increases to around 40%.
The highly-skilled, specialist nature of Worley’s work means it can earn higher margins than traditional engineering and construction firms while most contracts are of a cost-plus nature, so the risk from project delays (cost overruns) or higher inflation (inputs/wages) are minimised.
Worley’s extensive capabilities support customers to reduce emissions and move towards a low carbon future, which was reinforced in the company’s recent presentation this month. Other key takeaways from the update include the return of some deferred works, a stable headcount, and a material upgrade to forecast operational savings from the Jacobs deal to $350m by FY22.
The Sustainability (Renewable) thematic to which Worley offers exposure is very strong. Offshore power (wind), conversions of refineries to biofuels, and green hydrogen projects continue to see a strong uptake. This will require significant investment in transmission and distribution infrastructure. 70% of Worley’s Top 20 customers have publically stated that they intend to reduce emissions, while all are investing in decarbonisation. Sustainability is a growing part of Worley’s business representing 29% of 1H21 revenues (45% of the sales pipeline) and accelerating. Sustainability projects being awarded are increasing in complexity, volume, and scale. These are technically complex projects which have a similar risk profile (mostly cost plus a margin) ensuring favourable gross margins compared to other services they provide.
Having already won 14 contracts this year, the medium and longer-term outlook for demand for Worley’s services has only improved. Amidst a strong global economic recovery, boom-like business confidence and conditions, and demand profiles outstripping current capacities in many industries, business investment in new and more efficient plant and equipment is predicted to accelerate rapidly in the coming months. This capital expenditure (CapEx) surge has already begun, with Australian business CapEx hitting its highest level in almost a decade during March. Federal Government infrastructure spending and the aforementioned Sustainability drive are likely to only strengthen demand for specialised engineering and construction services, boding well for future sales (revenue) and profit margins.
Despite these positive developments, a stable oil price, and a firmer overall market, Worley shares have eased over 10% from levels near $12 per share just recently. Trading at just 15x FY22 forecast earnings and offering a prospective 4.5% unfranked dividend yield, the stock screens as relatively good value amongst its domestic and international peer group, while on a consensus basis valuations are bullish, implying much of the recent falls can be recovered.
Read the latest presentation by Chief Executive Officer, Chris Ashton, here.
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