Treasure Chest: The Green Opportunity In Worley

This story features WORLEY LIMITED. For more info SHARE ANALYSIS: WOR

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today’s idea is on Worley.

Whose Idea Is It?

Morgans

The subject:

Worley ((WOR))

More info:

Worley is a leading global professional services firm providing engineering design, project management and maintenance services, with a growing focus on being the go-to sustainable solutions provider to the energy, chemicals and resources markets, noted Morgans in a research note this morning.

Morgans has initiated coverage of the stock with an Add rating (equivalent to Buy).

Morgans joins three other brokers monitored daily by FNArena who have Buy or equivalent ratings on the stock. In the bigger picture, the word “sustainable”, as used by Morgans, provides the underlying thesis.

Worley’s operational focus since 2020, notes Morgans, has been directed towards playing a growing role in the sustainability transition and digitisation of its targeted markets. With an estimated two to three times uplift in global clean energy investment required by 2030, to reach levels needed to achieve net-zero targets by 2050, Worley is positioned strongly to benefit from investment tailwinds to support structural change in its end markets.

In reporting on the company’s earnings result released in February, UBS said it believed the stock offers significant earnings leverage to a potential four-fold increase in energy investment globally, along with decarbonisation projects.

Goldman Sachs had earlier agreed the business is well-positioned to play a role in enabling the transition to a more sustainable energy mix over the long-term and expects this area will gain increased attention from investors as the pandemic-related impacts fade.

Margins

Post the earnings result, Macquarie noted Worley had captured profitable market share over the last 12-18 months, and cited potential for further contract wins in the near term.

The result confirmed a robust earnings outlook supported by progress towards a targeted 7.5-8.0% earnings margin target and double-digit revenue growth in the base business, Macquarie suggested.

UBS attributed the margin expansion to both rate improvements, given elevated engineering demand, and a favourable mix. Worley reiterated guidance for FY24 aggregated revenue growth and the broker expected 13% or more. The margin target of 7.5-8.0% was reiterated.

Citi highlighted in a report in April it does not understand why consensus is forecasting zero growth for Worley when the company is guiding to "growth".

Ord Minnett was nevertheless not so sure.

Despite having a bullish outlook for Worley, this broker suggested the market is overly optimistic, and thus the valuation multiple was too high.

Worley’s ambition is to achieve double-digit annualised earnings increases via market growth, increased market share, margin expansion and active portfolio management. But while Ord Minnett is forecasting a five-year compound annual growth rate for earnings of 11%, this assumes margin expansion to 9% versus 7% in the first half FY24, and a five-year historical average of 7%.

In addition to improved risk allocation across contracts and elimination of low margin contracts, margin improvement credits an increasing number of complex, large-scale sustainability-related projects, Ord Minnett noted, the prioritisation of higher-margin work, and operating leverage.

Increasing project complexity increases the risk of missteps, this broker warned. This is nevertheless where the market is heading, and Worley is committed to spending -$100m on strategic investment, including spending on capability and industry partnerships to manage risks.

Ord Minnett retained a Lighten rating, which sits between Hold and Sell on the broker’s five-tier ratings system.

Sell-Down

Having tracked largely sideways since its February result release, Worley shares plunged -7% on April 30. This was due to the sell-down to a 4.5% equity stake from a 23.5% stake by the company’s largest shareholder, Dubai-based Sidara (Dar Group) at $14.35.

Sidara had been a shareholder for over seven years and previously attempted a takeover bid in 2016.

Since 2019, Worley has positioned its Australian ownership to be in the “national interest” and it has written a submission to the Foreign Investment Review Board.

As reported by the AFR at the time, “the 36-page document says Worley was a globally significant Australian company with capabilities and networks that were highly valuable in the resolution of strategic challenges facing Australia and the world”.

These moves from Worley were seen as firm pushback against Dar Group seeking to obtain governance control initially, and then ownership of the company.

Morgans believes the sale represents a rare liquidity event driving near-term volatility in the share price. Hence, initiation of coverage with Add.

The broker has set an $18.00 target. This compares to Macquarie on $18.10, Citi on $20.00 and UBS on $22.00, all of whom have Buy or equivalent ratings.

Ord Minnett backs its Lighten rating with a $13.25 target, which still leaves an average of $18.27, suggesting 19% upside to the current trading price.

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