MIDAS SHARE TIPS: John Wood Group – An Opportunity to Carve Out a Spot in Your Investment Portfolio
By Rosie Murray-West
Updated: 21:52 BST, 26 August 2023
While John Wood Group may have had humble beginnings as a fishing company, its current presence in the oil industry consultancy business is hard to ignore. Originally spun out of a well-established trawler business in Aberdeen during the early 1980s, the company has evolved to undertake diverse projects such as carbon capture initiatives and pipeline overhauls for National Grid’s hydrogen gas transportation.
However, despite its impressive portfolio, John Wood Group has struggled to generate profits for its shareholders. Since the outbreak of Covid-19, the company’s shares have experienced a significant decline, plummeting 80% over the past five years. A recent failed takeover attempt by Apollo, a venture capital firm, initially inspired hope but ultimately led to despair. After closely courting John Wood Group, Apollo eventually decided against its proposed exploratory offer of £2.40 per share after reviewing the company’s financials. Apollo is now prohibited from making another bid for John Wood Group for the next six months.
While Apollo has not disclosed the specific reasons behind its withdrawal, John Wood Group’s latest six-month figures do not suggest any fishy business. The company reported a 16% year-on-year increase in revenue, with an order book that is 5% higher than the previous year in constant currency terms – slightly surpassing expectations.
However, due to a change in strategy implemented nine months ago, John Wood Group still experienced a pre-tax loss. The company sold its built environment consulting arm to reduce debt and shifted its focus to more secure contracts. The aborted Apollo deal incurred additional costs and left the company in a state of indebtedness. Nonetheless, CEO Ken Gilmartin remains optimistic about John Wood Group’s future as a stand-alone entity, despite acknowledging past failures in meeting expectations.
Gilmartin is particularly enthusiastic about John Wood Group’s involvement in the transition towards sustainable energy, citing that 20% of the company’s revenue stems from this sector. Despite potential concerns regarding energy prices and its relatively high debt burden, Gilmartin believes that the company can offset higher costs by passing them onto customers.
Additionally, the imminent retirement of esteemed finance chief David Kemp is expected to proceed smoothly with a suitable successor. Analysts have also pointed to recent significant contract wins, including a European minerals contract and a US life sciences job, as evidence of a promising future for John Wood Group. Alex Smith from Investec investment bank describes the company as having “momentum.”
The company’s strategic shift has led to an improved order book, and analysts anticipate that John Wood Group will return to positive free cash flow in the second half of the year. Although debt remains a factor, it is significantly lower than before the sale of the built environment division. While John Wood Group currently does not offer a dividend, some analysts predict it may do so in 2024.
Compared to its peers, some believe that John Wood Group is undervalued. With its share price at £1.55 and a market value of £1.08 billion, it is currently trading at less than nine times the forecasted earnings for 2024. Investec’s Smith suggests that if the company were in line with its competitors, the shares would be valued at £2.45 – surpassing Apollo’s bid price.
In conclusion, the recent rejection by Apollo may disappoint current shareholders of John Wood Group. However, this setback could potentially present a buying opportunity. With a diversified client portfolio spanning 60 countries and the continued demand for sustainable solutions in the oil and gas industry, the company’s recovery may not be immediate but could be rewarding in the long run. Additionally, there is always the possibility of attracting interest from other potential buyers in the near future. It may be time to reel in this opportunity.
Traded on: Main market
Ticker: WG
Contact: woodplc.com or 01224 851500
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