Wood Group returns to growth but debt cutting disappoints

Wood Group returned to growth in 2018 but said its growth cutting efforts would be slower than it planned after the merger with Amec Foster Wheeler.

Revenue including joint ventures of $11.04bn in the calendar year was up 11.7% on a proforma basis and adjusted EBITA rose 5.4% to $630m which the FTSE 100 energy services provider said reflected “good” trading momentum and cost synergy delivery of $55m.

Operating profit before exceptional items increased rose 68% to $357m, after non-cash amortisation charges of $249m, with the company’s loss for the period narrowing to $7.6m from $30.0m year-on-year, after exceptional costs of $183m related to synergy delivery, restructuring, impairment of EthosEnergy and guaranteed minimum pensions.

Net debt reduced to $1.5bn from $1.6bn, in line with the guidance provided in its December trading update. Total facilities headroom of $1.3bn.

Its net debt-to-adjusted EBITDA ratio reduced to 2.2x from 2.4x year-on-year but the post-merger aim to deleverage to 1.5x net debt-to-adjusted EBITDA would be, Wood said, more gradual than originally anticipated. This was blamed on the impact of slower sector recovery in oil and gas since completion, working capital commitments on the legacy AEGIS contract, and slower progress on non-core asset disposals due to the board’s "focus on value", with agreements entered to dispose of assets for consideration of more than $50m so far.

The directors said they were confident in the strong free cash flow generation of the business, with further deleveraging primarily driven by earnings growth in 2019, delivering cash conversion after exceptional items at between 80% and 85%, retaining capital discipline and the timing of additional disposals.

Cash conversion, calculated as cash generated from operations after exceptional items as a percentage of adjusted EBITDA, excluding joint ventures, improved “significantly” to 102% from a proforma 2017 of 14%, including the $154m that had been drawn down from Wood’s receivables facility.

Adjusted diluted earnings per share totalled 57.4 cents, which was up 8% and ahead of the company’s 2018 consensus, while basic losses per share narrowed to 1.3 cents from 7.4 cents year-on-year.

Wood Group proposed a final dividend of 23.7c, which would be an increase of 2%, in line with the company’s progressive dividend policy.

On the operational front, Wood Group reported higher activity levels across all of its business units, with growth in its Asset Solutions Americas (ASA) operation coming from power, downstream and chemicals, and US shale.

The Asset Solutions Europe, Africa, Asia, Australia (ASEAAA) unit grew in operations solutions work in Asia Pacific and the Middle East, while its Specialist Technical Solutions (STS) operation delivered increased activity in minerals processing, automation and control, and nuclear.

Finally, the Environment and Infrastructure Services (E&IS) operation saw increased consultancy work with long-standing customers in North America.

INTEGRATION GOING WELL

On the merger with Amec Foster Wheeler, which was completed in October 2017, Wood Group said the “well-aligned” operational cultures enabled integration ahead of schedule in 12 months.

It also reported “excellent progress” on cost synergies, with an in-year benefit of $55m in 2018 equating to an annualised run rate of $85m, and the three-year target increased 24% to $210m.

The company said it had secured revenue synergies of more than $600m, with a “strong” pipeline of opportunities, and embedded an “enhanced” risk management framework and project delivery governance.

Looking at 2019, Wood Group said it was “well-positioned” for growth trends emerging across a broad range of energy and industrial markets.

Its order book currently stood at $10.3bn, with around 60% of forecast revenue for 2019 secured in line with expectations for the current time of year.

Reimbursable work was the largest element, the board said, at around 70%.

Revenue growth in the region of 5% for the year would deliver organic earnings growth which, together with the impact of cost synergies of around $60m, was expected to lead to growth in adjusted EBITA in line with market expectations.

Chief executive Robin Watson said the integration of Amec Foster Wheeler was completed "at pace", with cost synergy targets increased 24% and new opportunities across a broader range of capabilities and sectors "unlocked" to secure revenue synergies of over $600m.

Watson said the company had built a “unique platform”, and was in the early stages of what it could achieve.

“Our performance in 2018 has strengthened our conviction in Wood's potential and we are excited about our prospects.

“We are confident of achieving further growth in 2019.”

Shares fell more than 8% on the day to 550p.

Analysts at Bereberg said: "We expect the update to be taken as a positive overall by the market: concerns may focus on the slower deleveraging and lower cash conversion targeted, but these fears may be offset by positive revenue momentum, delivery of synergies and the attempts to make reported earnings more representative. We note the high level of short interest in the stock."