L1 Capital: Worley

Worley is a leading global provider of professional project and asset services in the energy, chemicals and resources sectors. Worley has a worldwide team of ~50,000 consultants, engineers, construction workers and data scientists that are focused on solving complex problems for a range of multi-national clients.

Worley shares are trading ~30% below pre-COVID levels due to the significant fall in the oil price earlier this year and concerns over COVID-19 restrictions leading to a subdued recovery in oil demand. We believe Worley is an attractive investment, as the market incorrectly perceives the company as a direct exposure to the oil and gas industry, while greatly underappreciating the flexibility of its engineering consultancy led business model and the diversified nature of its operations. Worley is trading on only 13.5x consensus FY21 earnings which is a substantial discount to its 3-year average multiple of ~18x and is on a depressed earnings base impacted by COVID-19.

We believe Worley is much more comparable to a global engineering consultancy business than a lump-sum contractor. Worley derives ~80% of its revenue on a reimbursable basis, with only ~20% of revenue directly exposed to upstream/midstream oil and gas capex (post the ECR acquisition), down from ~65% previously. This has allowed Worley to proactively manage staff utilisation levels and deliver resilient FY20 earnings that demonstrated margin improvement, second half earnings in line with the first half and strong growth in cash generation despite the impacts of the oil downturn and COVID-19. Worley management have a history of strong delivery on prior cost out programs and have initiated a further $275m cost out program (26% of FY20 EBITDA). While the near-term revenue outlook may be more subdued, we believe the significant cost out program and streamlining of operations positions the company well to deliver margins ahead of consensus expectations and to take advantage of an improvement in the capex cycle as global growth recovers.

The main risk is further COVID-19 related restrictions or large declines in business confidence that extends global economic weakness.

Source: L1 Capital analysis, Worley FY20 results presentation

This information has been prepared and provided by L1 Capital. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.