Australia | Mar 01 2012
– WorleyParsons interim disappoints
– Earnings estimates trimmed
– Solid growth outlook appears priced in at current levels
By Chris Shaw
WorleyParsons ((WOR)) delivered a strong revenue result for the six months to the end of December, the group recording an increase relative to the previous corresponding period of 17%. Earnings were unable to follow suit however, falling a little short of market expectations due to lower hydrocarbon margins.
In the view of Credit Suisse some of this margin pressure was due to project-related issues, so there may be some improvement as these underperforming projects are completed in the current half.
The other disappointment in the interim result of WorleyParsons was weak cash flows, which declined by 49% relative to the previous corresponding period. Citi attributes this to an increase in working capital and increased incentive payments, as well as slower client payments. An improvement is expected in the June half.
Despite the cash flow and margin issues, management at WorleyParsons has re-affirmed guidance for good growth in underlying earnings in FY12. This means revisions to broker earnings estimates across the market have been relatively modest.
As an example, Citi has trimmed its full year earnings per share (EPS) estimate by 4.1% to144.6c, while its FY13 forecast is essentially unchanged at 181.7c. UBS has made similarly small changes this year, its EPS estimate declining to 143c from 145c previously.
Consensus EPS forecasts for WorleyParsons according to the FNArena database now stand at 148.9c for FY12 and 182.8c for FY13. This compares to the 120.6c achieved in FY11.
Current EPS forecasts suggest WorleyParsons should enjoy solid earnings growth through FY13. As Citi points out, this reflects ongoing increases in global oil and gas exploration and production capex, mining capex and new contract wins for WorleyParsons. These contract wins have contributed to increases in staff numbers, a trend UBS expects will continue.
The issue for the market is that these growth expectations appear priced into WorleyParsons at current levels. On UBS's numbers the stock is trading on earnings multiples of 20.7 times this year and 17.6 times in FY13.
This suggests limited valuation appeal, as UBS notes the FY12 multiple is a 53% premium to the domestic market and a premium of around 30% to selected global peers. As a result, UBS retains a Neutral rating.
Credit Suisse and Citi have matched this rating even with an increased price target from the latter of $29.95, up from $28.28 previously. The consensus price target for WorleyParsons according to the FNArena database is $28.86, an increase from the previous consensus target of $28.45.
Overall the database shows WorleyParsons is rated as Buy once, Hold five times and Sell once. The latter is courtesy of JP Morgan (on a sector-relative basis), who expects the interim earnings miss and somewhat uninspiring guidance from management for the full year will result in cuts to consensus numbers.
Assuming this plays out JP Morgan sees the share price of WorleyParsons coming under some pressure, particularly given the already full multiple on which the stock is trading.
Shares in WorleyParsons today are slightly weaker and as at 12.10pm the stock was down 6c at $29.31, which compares to a range over the past year of $21.13 to $33.61. The current share price is broadly in-line with the consensus price target in the FNArena database.
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