It wasn’t a good Valentine’s Day for shareholders in John Wood Group (LSE:WG.), the FTSE company that describes itself as “a global leader in consulting and engineering across energy and materials”.
On 14 February, its shares closed 55.6% lower, at 29p, after the company released a trading update.
It caps a miserable period for investors. On 5 August 2024, the stock fell 35% after a takeover for the company fell through.
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Three months later, on 7 November 2024, the shares fell 60% after the firm said it had experienced a “mixed quarter” and announced an independent review. The directors appointed Deloitte to “focus on reported positions on contracts in Projects, accounting, governance and controls, including whether any prior year restatement may be required.”
And then there was Friday’s news. Reminiscent of a Valentine’s Day massacre, investors appear to have fallen out of love with the company.
The upshot of all this is that the John Wood Group’s share price has fallen 85% in just over six months. Prior to being abandoned, the agreed price for the takeover was 220p a share.
Surely things can’t get any worse?
Not all bad news
But despite this doom and gloom, I think the announcement included some positives.
When the company’s accounts are finalised, the directors are expecting 2024 adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) of $450m-$460m, which is exactly what the analysts were forecasting prior to the press release being issued.
If realised, earnings per share will be 6.7 cents (5.3p at current exchange rates). This implies an astonishingly low price-to-earnings ratio of 5.5.
And the group expects its profits to grow by 10%, in 2025. Again, this is in line with the forecasts of the analysts.
Encouragingly, as of 31 December 2024, the company’s order book was $6.2bn. This is an $800m (14.8%) improvement on the position three months earlier. Despite its woes, the company appears to be good at what it does.
Can the information be trusted?
However, despite these glimmers of hope, I won’t be investing in the company.
My principal concern is that the trading update was presented in draft format and “subject to the conclusion of the independent review”. In other words, the figures might not be reliable.
And until these doubts are removed, I suspect investors will remain jittery.
In some respects, it doesn’t really matter whether the company’s historical results have to be restated. It’s the future that’s important. However, having confidence in a management team is, in my opinion, essential when it comes to investing. After all, if I buy a particular stock I’m entrusting my money to its directors.
As a result of its troubles, the company’s now expecting a negative free cash outflow of $150m-$200m in 2025. This is despite its expectation of being profitable. However, the costs of the independent review and legacy claims liabilities will affect its cash this year.
For these reasons, I’m going to avoid taking a position in John Wood Group. Although the company’s directors are confident that the ongoing review will not have a significant impact on its cash position — or its ability to generate cash in the future — it has identified material weaknesses and failures.
This stock’s not for me.
