Search Share Prices
JP Morgan believes markets underestimating potential for synergies at Wood Group
Analysts at JP Morgan reiterated their 'overweight' stance for shares of Wood Group, telling clients it remained a 'top pick' in the oil field services space for 2018.
The basis of their call was the company's "compelling scale" and synergy-backed sector-leading earnings growth, which meant the company's valuation was "inexpensive".
Despite the underperformance by the shares since its 13 December trading update, due to its higher net debt and weaker-than-expected cash conversion, the investment bank said it remained "comfortable" with its 2018 fiscal year forecasts for sales of roughly $10bn and earnings before interest and amortisation of $629m.
Furthermore, in JP Morgan's opinion markets were not giving sufficient credit to potential upside synergies at Wood Group.
As a base case, they believed synergies would drive an approximately 35% jump in the company's earnings per share in 2020 versus 2018, yet given management commentary saw the potential for greater savings.
Yes, the firm's net debt-to-EBITDA ratio was now only seen falling to between 0.5 and 1.5 times in 2020, six months later than previously expected, due to persistently "tough" payment conditions.
Nonetheless, JP Morgan expected 2017 to be the trough, as the risk of a further deterioration in payment terms subsided, synergies came through and levels of activity improved.
"Clarity on 2018 guidance should set the platform for the market to shift its gaze longer term and recognize the compelling
forward valuation."
"Improving cash generation is an important trigger for the market to focus on the longer-term potential that we believe WG offers. We see 2017 as the trough as risk of further deterioration in payment terms subsides, synergies are delivered and activity levels gradually improve."
JP Morgan trimmed its target price for Wood Group from 780p to 770p.