Wood Group (LSE:WG.) shares pushed upwards on 22 August following a positive trading update. The engineering and consultancy firm posted better-than-expected adjusted H1 earnings. This also led management to say that annual profit would be ahead of forecasts.
So, having fallen 80% over the past five years, is it time investors reconsidered Wood Group?
Valuation
The share price has collapsed in recent years. The FTSE 250 company had suffered from a couple years of diminishing growth before refocusing its efforts on the renewables sector. It then went on to sell its Environment and Infrastructure business. More recently, we can observe a price spike associated with an abandoned takeover by Apollo Global Management.
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This falling share price has meant that the company’s valuation relative to its sales and earnings looks more attractive. The table below highlights some relative valuations versus the energy industry.
| Wood Group | Energy Average | |
| EV-to-sales (TTM) | 0.38 | 1.98 |
| EV-to-sales (Forward) | 0.36 | 2.22 |
| EV-to-EBITDA (Forward) | 5.1 | 5.9 |
| Price-to-book | 0.35 | 1.7 |
Wood Group’s relative valuations indicate a more attractive positioning compared to the broader energy sector. This could potentially present an opportunity for investors seeking relatively more favourable valuation metrics within the industry.
However, it’s worth highlighting that it’s not strictly fair comparing Wood Group with all energy companies. That’s the case for any comparison within the industry. For example, oil majors have a very different business model and profit margins.
Positive momentum
The favourable trading results could be a pivotal moment for the share price of the Aberdeen-based company. Looking ahead, Wood Group anticipates that the adjusted core earnings margin will remain relatively stable in the short term, hovering around 7%.
This projection is influenced by ongoing business investments. The adjusted EBITDA margin actually fell from 7.2% last year to 6.8% in the first half of 2023.
Furthermore, the firm stated that while its adjusted EBITDA for the whole of 2023 is exceeding initial expectations, it now aligns with its medium-term goal of mid-to-high single-digit growth. This strategic focus on sustained growth is significant as investors are rightfully concerned about committing to stocks lacking a well-defined growth path.
The improved financial figures also have a positive bearing on the company’s debt situation. The ratio of net debt to adjusted EBITDA currently stands at two times, marking a notable improvement from the previous year’s figure of four times.
This favourable shift in debt metrics underscores the company’s efforts to manage its financial obligations more effectively and could potentially contribute to enhanced investor confidence.
Out of the Woods?
The update undoubtedly casts a positive light on the situation. Nevertheless, it’s important to acknowledge that debt levels could become challenging should performance dip once again. Meanwhile, it’s worth highlighting that the company’s profitability has been mixed over the past five years.
With these considerations in mind, investors might be prudent to approach the situation with caution. However, the current share price is certainly enticing.
