WorleyParsons Set For Strong Growth

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 – Positive investor day commentary from WorleyParsons
 – Expansion of services increasing contract opportunities
 – Earnings estimates and price targets lifted
 – Broker ratings split between Buy and Hold

By Chris Shaw

A key theme at the WorleyParsons ((WOR)) investor day held last week was the company's broad global position across both developed and developing markets. As Macquarie notes, WorleyParsons now has 137 offices around the world and significant workforces in markets such as the Middle East and Africa.

For Deutsche Bank, another key point to come out of the investor day is WorleyParsons is now not simply an engineering services firm, but a company that can offer a full range of contracting services in hydrocarbons, minerals and metals markets.

Citi sees this as important, as the fact WorleyParsons is developing a strong global end-to-end capability in its markets is delivering increased opportunities to win contracts. This is especially the case with respect to tier-1 companies such as Rio Tinto ((RIO)) and Anglo American, where contracts can be larger.

A change in operational management structure was also announced at the investor day, with Credit Suisse seeing these changes as evidence of an increased focus on improving and expanding the total product offering. 

WorleyParsons has also introduced Project Agility, which Credit Suisse notes is a business simplification and cost reduction program aimed at improving business efficiency through the company. Implementation of the project should deliver some margin improvement according to Credit Suisse.

There should also be a benefit from the ability of WorleyParsons to push margins higher on US upstream oil and gas projects in the past six months, as this is being achieved while margins remain flat in the Power division. 

Macquarie sees this trend as positive for group margins overall, as increased volumes should see a better absorption of overhead costs. Macquarie does point out there is likely to be a lag before the full impact of better margins flows through to earnings.

For Goldman Sachs, the changes announced at the investor day mean WorleyPasons has now essentially completed a period of restructuring and simplifying group operations, which has positioned the company for its next growth period.

To reflect this and a buoyant outlook for the hydrocarbon and minerals and metals sectors, Goldman Sachs has lifted earnings per share (EPS) forecasts for WorleyParsons by about 4% in FY12 and by better than 8% in FY13. Forecasts for FY11 are unchanged.

Goldman Sachs is now forecasting EPS of 136.8c this year, 174c in FY12 and 196.6c in FY13, which compares to consensus forecasts according to the FNArena database of 129.5c this year and 163.3c in FY12. 

Consensus forecasts have increased modestly post the investor day, with Deutsche bank lifting forecasts by 3-6% for FY11-FY12 and Citi lifting its numbers by around 2%. The changes mean an increase in consensus price target in the FNArena database, the target moving to $31.60 from $30.92.

There were no changes in broker ratings for WorleyParsons on the back of the investor day, though last week BA Merrill Lynch upgraded to a Buy from Neutral previously. The upgrade reflected increases to earnings estimates and price target from changes in revenue and employee assumptions. The FNArena database shows WorleyParsons is rated as Buy and Hold four times each. 

Among those rating the stock as a Hold, Credit Suisse's call is valuation based as on the broker's numbers the stock is on a 12-month forward earnings multiple of around 20 times while generating around 17% earnings growth.

One reason Macquarie rates WorleyParsons as Outperform is the expectation of margin improvement, while also noting on relative valuation grounds the stock has underperformed global peers over the past six months.

Deutsche Bank also picked up on this in reiterating a Buy rating, suggesting at current levels WorleyParsons offers compelling value relative to global peers thanks to a superior earnings growth profile and higher dividend yield. 

Citi is a little more cautious, suggesting at current share price levels there need to be signs of stronger than expected margin recovery before a more positive view can be justified. Goldman Sachs is not in the FNArena database but also rates WorleyParsons as Hold on valuation grounds.

The shares are currently trading near FNArena's consensus price target.

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