Can Investors Trust WorleyParsons’ Guidance?

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By Chris Shaw

Market expectations had previously been for WorleyParsons ((WOR)) to lift earnings in FY11, so in that sense the reiteration of earnings guidance from management at the company's annual general meeting yesterday was no cause for concern.

But what management also indicated was earnings would be strongly weighted to the second half as earnings in the first half are likely to be below those of the same period last year. This is an issue for Credit Suisse, as the earnings split reflects project roll-offs and a slow ramp-up in new projects. Further project deferrals offer some risk to forecasts in the broker's view.

Macquarie agrees, noting the market is likely to be sceptical regarding an improvement in earnings in the second half of the year given last January's downgrade to earnings guidance shows this is no sure thing. The broker does suggest demand improvement and stronger upstream oil and gas activity will be more evident in the second half than in the first half.

New contract wins should also help, Macquarie expecting WorleyParsons will win some new work at the BG Curtis Island LNG project, among others. Such contract wins could be significant, Macquarie noting there is potentially $600 million in new contracts to be awarded for the Curtis Island project alone.

Another point of concern with respect to group earnings is a stronger Australian dollar, JP Morgan noting this will act as a headwind through the translation of Worley's offshore earnings. According to UBS, each 1c move in the Australian dollar against the US dollar has a $1.5 million impact on group net profit.

In divisional terms, WorleyParsons is expected to deliver higher earnings in the Hydrocarbons, Power and Infrastructure and Environment divisions, while Minerals and Metals earnings now appear likely to be lower than in FY10.

Post the AGM stockbrokers have lowered earnings forecasts for WorleyParsons, the cuts to numbers ranging from around 3% for Macquarie and Credit Suisse to 6-7% for Citi and 10-12% for JP Morgan. In earnings per share terms consensus forecasts now stand at 128.8c in FY11 and 151.8c in FY12. UBS remains quite aggressive in forecasting EPS of 141c in FY11 and 171c in FY12, while Citi is below consensus with respective forecasts of 122.7c and 143.9c.

The cuts to earnings forecasts across the market mean reductions in price targets, the consensus price target according to the FNArena database falling to $23.07 from just over $24.00 prior to the AGM update.

As with earnings forecasts there are a wide range of price targets for WorleyParsons, with Deutsche Bank the low marker with a target of $21.00 and UBS the highest with a target of $25.00. Ratings also cover a wide range, the database showing two Buys, five Holds and one Sell recommendation.

The only downgrade in rating post the AGM comes from Deutsche, which has moved to a Hold rating from Buy previously.

Macquarie retains a Buy recommendation as it continues to see value, estimating WorleyParsons is trading on only a 5% premium to global peers based on FY11 earnings. UBS agrees there is longer-term value in the stock at current levels.

In contrast, JP Morgan estimates WorleyParsons is trading on a least a 20% premium to the ASX Industrials for FY11 and so is not compelling value at present. Any price weakness that brought this premium down would see the broker turn more positive on the stock.

Shares in WorleyParsons today are higher and as at 1.45pm the stock was up 24c at $22.60. Over the past 12 months the stock has traded in a range of $19.95 to $30.95, while the current share price implies upside of around 2.6% to the consensus price target in the FNArena database.

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