Wood Group's purchase of AMEC addresses low gearing, UBS says

The rationale for Wood Group's bid for AMEC Foster Wheeler lay in its low gearing and narrow business focus, analysts at UBS said.

Without any "attractive" M&A targets to go after, its balance sheet was under-geared, with a net debt-to-EBITDA ratio of 0.5.

That, analyst Amy Wong said, was more appropriate for normal-to-peak market conditions, not for bottom of the cycle.

Wood's oil exposure was also running at about 85% of revenues before the deal, versus 60% after the fact.

Purchasing AMEC should also broaden Wood's position, adding new positions in mining, environment and infrastructure and power generation.

Wong also revised higher her estimates for how accretive the transaction would be to its standalone earnings per share in 2018 and 2019.

She had originally penciled in 2% accretion.

At her target price, the shares would be trading on 14.2 times her estimate for 2018 earnings on a standalone basis, above their five-year average of 12.5, "as we have liked WG's quality and believe that the stock should have longer term re-rating potential".

UBS reiterated its 'Neutral' recommendation and left its 875.0p target in place.