A low quality interim result from Worley has been ignored by the market, preferring to sip the company Kool-Aid of a rising global resource capex profile and the company’s reliance on that trend.
WOR 1H22 reported EBITA of $251 million was a 21% increase on the same period last year. A higher corporate overhead charge ate into the segmental gains made. The cashflow outcome of $89 million was disappointing, down 65% on last year, implying just 38% conversion of EBITDA due to working capital drags. There was also $46 million in significant items that spoiled the result quality.
WOR is adapting its workload to encourage much more ‘sustainability’ work which is currently at $1.4 billion and attracts good margins. The company is aspiring to reach 75% of its revenue from sustainability-related business within 5 years and is investing $100 million over three years to build internal capability towards this goal.
The company is investing a further $64 million in FY23f capex to chase an incremental ~$23 million pa in cost savings. The cost saving target has been increased from $350 million to $375 million pa by the end of FY23f.
As ever, WOR’s outlook is positive and the 6% half-on-half increase in work backlog to $15.1 billion provides comfort but came with another 4% increase in headcount to almost 50k mouths to feed.
Investment view
WOR’s positive outlook is premised on the capex profile of the major global resource companies. The seven energy majors, for example, have collectively pointed to capex spending around US$105 billion which is 19% ahead of the 2021 outcome.
WOR’s pivot towards the themes du jour of sustainability and decarbonisation is not without merit, but it smacks of the Worley tendency to constantly paint a rosy picture without actually delivering the earnings. We reiterate a comment from a previous note pointing out that WOR has regularly stripped out ‘one-off’ items for restructuring, transitions and onerous contracts for the last seven years, amounting to a whopping $940 million. It’s a hard habit to break so we cautiously ponder the shiny new world order of sustainability work for WOR and sheepishly upgrade our Sell recommendation to a Hold.
Risks to investment view
The workflow for WOR could increase by more than we anticipate if global resource and energy capex booms. Contract wins and extensions may not meet assumed levels.
Recommendation
We have upgraded our recommendation from Sell to Hold.
