Jefferies upgrades Wood Group to 'buy'

Jefferies upgraded Wood Group on Monday to ‘buy’ from ‘hold’ and hiked the price target to 190p from 150p.

This marked the first upgrade to buy in more than five years.

"Improved medium-term cashflow outlook sees our discount cash flow valuation almost double, and we view the weak market reaction and analyst downgrades since the capital markets day as an opportunity," the bank said.

Jefferies said it finally has confidence that the years of cash exceptionals since the Amec Foster Wheeler deal are under control and recommended that investors "see the positive Wood through the Trees".

"We have confidence in WG's guidance on cash exceptional outflows given at its 29 Nov 2022 CMD and therefore finally see a route to reducing cash exceptionals which, in parallel to other CMD guidance on revenue & EBITDA margin, means the balance sheet will remain in its target range of 0.5 - 1.5x (albeit at the top end of the range) and Wood will be able to focus on delivering growth and returns in its target markets," the bank said.

Jefferies said it continues to see headcount as a limiting factor in revenue growth for a reimbursable business which is why inorganic bolt-on M&A is important. However, in the absence of M&A, it sees revenue growth targets given at the CMD as achievable and therefore overall sees the stock trading at an attractive discount to peers.

At 1220 GMT, the shares were up 4.2% at 132.05p.