Wood Group upgraded by Numis on aggressively cutting potential

Numis has upgraded shares in Wood Group to 'buy' from 'hold' after it reported encouraging results last week.

While revenues declined 19%, more than Numis expectations of a 13% fall, the engineer demonstrated the benefits of its asset-light business model by making significant cost savings to protect margins, with guidance for FY15 raised from cost cuts to $80m from $30m.

"We believe its 1H15 results have demonstrated management’s ability to flex its cost base effectively to largely offset the effects of volume pressure on margins," the broker said.

To reflect these results and the increasingly tough outlook for the 2016 financial year Numis has upgraded its full year 2015 earnings per share expectations by 1% and downgraded its 2016 EPS forecast by 7%.

While believing 2016 earnings consensus has further to fall, analyst Kathryn Leonard said she believed that this is now broadly reflected by the price and should not be surprising to the market given the most recent rout in oil prices.

"Despite downgrading our FY16 forecasts today, we believe Wood Group will ultimately end up being a relative outperformer this cycle as it is one of the few constituents that can aggressively cut its coat according to its cloth, without damaging its business prospects, and has the balance sheet flexibility to make value enhancing acquisitions that inorganically grow the top line in the short term, and provide opportunities for additional organic growth in the medium to long term."