Is the British engineering and consulting business worth considering as a value/turnaround play? Let’s discuss.

What’s going on?

When a stock tanks like this, it’s important to find out what’s going on. This can help determine if there’s a potential investment opportunity. Now, in this case, there are a few issues that need to be highlighted. And some of these are pretty serious.

For a start, the company advised earlier this month it now expects negative free cash flow of $150m-$200m for 2025. Previously, it was forecasting “significant” free cash flow for the year.

This lack of cash flow could be a problem for the group as it has quite a bit of debt on its balance sheet ($690m at the end of 2024). According to analysts at Kepler Cheuvreux, the company may need to raise $400m from investors to stay afloat.

Next, the company recently commissioned an independent review of its financials by Deloitte after discussions with its auditor. And this review has identified “material” weakness and failures in the group’s financial culture, governance, and controls.

It’s worth noting here that following provisional indications from the review, the company’s evaluating the extent of prior year adjustments to its financials. In other words, previous earnings may need to be restated.

Additionally, the company recently said CFO Arvind Balan had stepped down with immediate effect. He had been in the role for less than a year.

So overall, there’s quite a bit to process here. It’s easy to see why investors have dumped the stock.

Worth a look today?

When a stock falls by 80%+, there can sometimes be an opportunity for a rebound. But investors need to weigh up the possibility of a rebound against the risks (further share price weakness).

Now, taking a bullish view for a minute, the company’s planning to transform itself by moving away from lump-sum turnkey projects (where a contractor agrees to complete a project for a fixed price) and cutting costs (annualised savings of $60m this year). These moves could help to improve its fortunes.

However, in my view, the risks here are very high. The debt on the balance sheet’s a problem, especially with the lack of free cash flow. If the company’s forced to raise equity to address this, it could lead to further share price weakness for investors. Often, a major equity raise dilutes existing shareholders’ holdings significantly.

I’m also concerned about the provisional findings from the independent review. At this stage, we don’t know how prior earnings will be affected.

One other thing worth mentioning is that in 2023, private equity firm Apollo Global Management made several offers for this company. However, it then suddenly decided it wasn’t interested in a deal. Apollo didn’t say why it pulled out, but the sudden withdrawal suggests it saw something it didn’t like.

Given the risks, I don’t see much appeal here. I think there are much better stocks to consider buying today.

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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.

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.

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Both companies have found themselves in hot water this year. Questions from investors are now circulating regarding both firm’s financial health, as well as uncertainty surrounding looming external threats. With that in mind, it’s no surprise both stocks have seen around two-thirds of their market-caps wiped out. What’s going on?

Financial audits are never a good sign

It doesn’t take more than a quick glance at John Wood’s stock price chart to notice that something’s very wrong. Since the start of 2024, the FTSE 250 stock has collapsed by over 60%, suffering from two double-digit crashes in August and November.

All of this comes after failed multiple takeover bids in the later stages of due diligence and negotiation. Then, in its subsequent results, an impairment charge of $815m and $140m in project exit expenses were announced, along with an independent audit of its financials.

To be fair, an impairment charge doesn’t affect cash flow. And the firm’s consulting division does appear to be performing admirably, delivering better margins. As such, management’s reiterated its full-year guidance. However, with more questions than answers, John Wood Group isn’t a business I’m rushing to add to my portfolio today, even if the valuation looks cheap.

Regulatory probes are bad for business

Close Brothers is another stock that’s taken a massive hit this year, falling by more than 70% since January. In fact, it’s fallen so much that its price-to-earnings ratio sits at just 3.5 today. By itself, an earnings multiple this low suggests a screaming buying opportunity. But after closer inspection, this seems to be nothing more than a value trap, in my opinion.

The company’s found itself at the centre of the ongoing FCA investigation into motor finance loans and undisclosed commissions. The regulatory probe’s still ongoing, but if it finds wrongdoing, Close Brothers could be facing a fine of up to £640m, according to estimates by analysts at RBC Capital Markets. That’s almost six times what the firm made in net profit in its 2024 fiscal year ending in July.

As horrendous as this sounds, it’s important to note that nothing’s guaranteed. Even if Close Brothers is found liable, the fine could be considerably less than currently expected. Given how low the stock price is, that could spark a welcome rally in the short term.

However, just like with John Wood Group, I’m not interested in investing in a business that’s shrouded with uncertainty, especially when regulators are involved.

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Looking at the list of most bought shares on Hargreaves Lansdown’s platform, the three most popular shares on the London Stock Exchange right now are John Wood Group (LSE:WG.), Rolls-Royce and AstraZeneca. But this begs the question, are they actually good investments?

Generally speaking, popular shares seldom deliver the best returns. Rolls-Royce certainly seems to defy that logic, with shares up almost 140% in the last 12 months. But with so much growth already under its belt, the opportunity to profit may have already passed.

All of this is to say that blindly buying what’s popular isn’t a sound investment strategy. And a closer inspection of John Wood Group immediately reveals why.

The popularity trap

It doesn’t take much effort to notice that something is going horribly wrong with John Wood. Shares of the engineering business collapsed 60% this month on the back of its latest earnings. And that’s after already suffering a 35% crash in August.

Management’s been under a lot of investor pressure in recent years. Shareholder demand forced the board to entertain a potential buyout offer in 2023 from private equity group Apollo. The deal ultimately fell through. But it was less than a year later that another interested party, Sidara, came along for another try. Once again, shareholders pressured management to consider a buyout and, once again, the deal failed, triggering that crash in August.

Meanwhile, John Wood’s latest interim results revealed a $815m impairment charge along with $140m in additional expenses as the firm exits certain projects. Combined, that translated into a monstrous operating loss of $899m. And with the announcement of an independent audit of its financials in its third-quarter results, the stock price once again plummeted.

Needless to say, the situation at Wood Group’s pretty dire. Withdrawals of takeover bids followed by an audit don’t exactly paint a healthy picture. And any investors who are just following the crowd could find themselves saddled with what appears to be a ticking time bomb. So why are Wood Group shares so popular right now?

The hope for a comeback

As disastrous as the situation seems, there are a few additional factors to consider. To start things off, the $815m impairment was charged against goodwill, which is a non-cash expense. In other words, this is only a paper loss. In the meantime, some encouraging signs are emerging.

Over in the consulting segment, John Wood’s seemingly been able to exercise some pricing power and expand profit margins. Management’s also been disposing of underperforming non-core operations helping to raise $125m. And overall, it recently reiterated its full-year guidance.

Assuming these targets are met, and with the shares trading close to their 52-week low, this may be a buying opportunity to consider. However, that’s a pretty big assumption, especially if the audit reveals even more impairment charges. That’s why it’s not a risk I’m willing to take, even with £100.

The post 3 no-brainer UK shares to consider buying with just £100? appeared first on The Motley Fool UK.

But the bid fell through on 5 August when Sidara decided not to make a firm offer, blaming “geopolitical risks and financial market uncertainty”.

This situation has left chief executive Ken Gilmartin under renewed pressure. However, Wood’s latest half-year results suggest to me that a genuine recovery’s underway. If Gilmartin can deliver on his targets, my analysis suggests the stock could be too cheap at current levels.

Performance is improving

There’s an old stock market saying that turnover is vanity, profit is sanity and cash flow is reality. What this means is that it’s easy to boost sales (turnover) if you aren’t too worried about making a profit.

Gilmartin’s wisely resisting the temptation to boost revenue with risky, low-margin work. Instead, his focus is on improving profit margins and cash generation. This should make Wood Group a better-quality business.

The company’s half-year results suggest to me that he’s making progress. Although revenue fell 4.8% to $2,844m compared to the first half of 2023, adjusted operating profit for the half year rose 14.2% to $102m. Cash flow from operations also rose 29.3% to $51m on an adjusted basis.

Wood Group hasn’t yet reached a point where it’s generating surplus cash to fund debt repayments or dividends. But it’s getting closer.

Gilmartin left his financial targets for 2024 and 2025 unchanged at the half-year mark and expects to report “significant free cash flow” in 2025.

Why it could be too cheap

Broker forecasts I’ve seen suggest Wood Group could generate $136m of surplus cash in 2025. Comparing this estimate to the company’s £925m market-cap gives me a forecast free cash flow yield of 11%.

As a rule of thumb, I’d consider anything above 6% to be potentially cheap. But there’s a catch. Wood Group has more than $1bn of net debt. That’s a bit too high for my liking. If the company hits its free cash flow targets, I expect a lot of this cash to be used to repay debt. A return to dividend payments could take longer.

However, the firm’s debt problems are no secret. They’re one reason why the stock’s trading more than 40% below its book value, which I estimate at 245p per share.

If Gilmartin can rebuild Wood’s profits and cut debt, I think the share price could bounce back towards that 245p level. Based on a recent price of 135p, this could turn 55p invested today into 100p.

What I’d do now

Wood Group still faces turnaround challenges, and its order book could shrink if oil and gas markets slow. Debt remains a risk, for now at least.

The company also has nearly $300m of historic liabilities relating to asbestos compensation payouts. These are expected to continue to at least 2050.

Even so, I think most of the risks are now reflected in the share price. If Wood Group’s recovery continues as expected, I reckon the shares could perform well from current levels.

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The Wood Group share price, on the other hand, gained more by doing the exact opposite – turning down a major buyout offer. The oilfield engineering company turned down a £1.4bn cash offer from Dubai-based rival Sidara last week. In a statement following the rejection, it said the offer “fundamentally undervalued Wood and its future prospects”.

With most UK stocks currently undervalued due to a weakened pound, foreign firms are falling over themselves trying to snap up a cheap deal. Last month, Anglo American turned down an offer from Aussie rival BHP, with rumours of counteroffers from Glencore and Rio Tinto on the cards. Shell, meanwhile, has said it’s open to the idea of a move while BP has previously reassured investors it plans to stay.

Why did Wood turn down the deal?

I’ll be honest, I haven’t been following Wood Group closely as it hasn’t popped up in my newsfeed recently. The share price made some gains in 2023 but is down 56% in the past five years. It’s now down to 195p after peaking at nearly 900p in January 2017. Currently, the price is back at the same level it was almost exactly one year ago when it fell from 219p to 140p in the second week of last May.

A buyout offer doesn’t necessarily mean the company’s doing well, but Sidara must see some value in it. Not that much value though, as its £1.4bn offer only barely exceeds the company’s £1.35bn market-cap. With Wood’s past earnings having declined at an average annual rate of -54%, I’m trying to figure out what prompted the unsolicited offer. 

An acceptable balance sheet with mild growth potential

Admittedly, Wood’s revenue is up 8% since last year and analyst consensus expects earnings to grow at a rate of 93.4% a year going forward. It also has a fairly clean balance sheet, with enough equity to cover its debt but a slightly low interest coverage ratio of only 0.8. That could become a problem if operating income doesn’t improve soon. 

Overall, it seems to be operating fairly well and could have a promising future. But I would expect a competing firm to base an aggressive buyout offer on something more concrete than that.

The company isn’t doing badly per se but I’m not sure where the high confidence in its future growth comes from. Unless it knows something I don’t, I can’t see a lot of evidence to suggest significant share price growth from here.

I think Wood may have been right to reject the first offer but I expect it will accept a larger counter offer. So while the recent price jump’s impressive, I would wait to see where this goes before expecting any further growth. 

For now, I’d rather put my money into a more promising oil stock like Harbour Energy, which has seen 300% earnings growth in the past year and has a 6.9% dividend yield. Now that’s something I can get my teeth into.

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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.

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’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.

The post Down 80%, is it time to reconsider Wood Group shares? appeared first on The Motley Fool UK.

A dirt-cheap bargain?

Royal Mail (LSE: RMG) shares have fallen by more than 30% over the last year. This slump has left the shares trading on six times forecast profits, with a prospective dividend yield of 6.8%.

Admittedly, profits are expected to fall this year as the boost from the pandemic fades. Rising fuel and labour costs are also a potential concern.

Even so, brokers’ consensus estimates suggest that Royal Mail will generate £349m of surplus cash in the 2022/23 financial year, rising to £412m in 2023/24.

My sums suggest that the near-7% dividend yield should be comfortably covered by Royal Mail’s cash generation, reducing the risk of a cut. An added attraction is Royal Mail’s large property portfolio. This business has plenty of asset backing, in addition to its trading profits.

I think Royal Mail looks like a classic value stock at current levels. I may add the shares to my portfolio in the coming weeks.

Energy market opportunity

My next pick is energy services firm Wood Group (LSE: WG). This business started out as a North Sea oil services provider, but offers a much broader range of energy operations today.

Unfortunately, the group’s diversification has coincided with a difficult period for energy markets. Debt has remained stubbornly high in recent years and profits have been disappointing.

Wood Group’s share price has dropped 15% over the last year and is 70% lower than five years ago. However, I think we’ve seen the bottom.

Wood is now selling its infrastructure business, which always looked like a mis-matched acquisition to me. At the same time, I expect the group’s core energy business to be enjoying improved demand, due to higher oil prices, plus continued growth in renewable projects.

Wood Group’s turnaround has taken a lot longer than expected. It’s not over yet. But this business is expected to return to profit in 2022 and could resume dividend payments in 2023.

Right now, I think Wood Group could be one of the best value opportunities in the energy sector.

An overlooked value stock

Chemicals group Synthomer (LSE: SYNT) has its heritage in the Malaysian rubber industry. Today, it produces a wide range of polymer-based products. These include latex gloves, foam for consumer goods, adhesives, and chemicals used by industrial customers.

The last three years have been a rollercoaster for shareholders. The shares rose from a low of 205p in March 2020 to 550p in 2021, as demand for latex gloves boomed during the pandemic.

Market conditions are now returning to normal and Synthomer shares have dropped back to around 300p.

One risk I can see is that slowing economic growth could have a knock-on effect on demand. With the boost from the pandemic gone, profits could disappoint.

However, I think that the share price already provides a fair margin of safety. Based on broker forecasts, Synthomer shares trade on less than eight times forecast earnings, with a dividend yield of 5.4%.

Synthomer could be the next stock I buy for my portfolio.

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And as market sentiment improves, I believe investors may reevaluate their prospects and send valuations higher. With that in mind, here are two dirt-cheap UK shares I’d buy today. 

UK shares to buy

The first company on my list is the specialist property real estate investment trust (REIT) Capital & Regional (LSE: CAL). This organisation owns shopping centres around the UK. 

The pandemic has decimated this sector, and Capital hasn’t been able to escape the pain. For its 2020 financial year, the company reported a loss of £200m, nearly 2.5 times its current market capitalisation. 

Property writedowns, as well as lower levels of rent collection, have all hurt the group. However, things are starting to look up. Occupancy across the company’s portfolio was nearly 90% at the end of May.

Moreover, 99% of leased units were open and trading across the group’s seven shopping centres towards the end of June. On top of this, the firm has agreed 38 new lettings and renewals this year. 

These are all positive developments. Still, this business isn’t out of the woods yet. There’s been a structural shift over the past 24 months away from brick-and-mortar stores towards online retail. This is likely to have a lasting impact on the group’s property portfolio. Revenues may never recover to pre-pandemic levels. 

Nevertheless, right now, the stock is selling at a price-to-book (P/B) value of around 0.5. I think this looks dirt-cheap. So, while the stock might have its risks, I’d buy the firm as part of my basket of UK shares. 

Stormy waters

Another company I’d buy for my portfolio of dirt-cheap UK shares is John Wood (LSE: WG). This oil and gas services business has been battered by volatile oil prices recently. Its subsidiary, Amec Foster Wheeler Energy Limited, has also had to deal with an investigation from the UK Serious Fraud Office. This investigation recently ended with a £103m deferred prosecution agreement. 

With the investigation out of the way, and the outlook for the oil and gas industry looking up, John Wood can now focus on growth. 

And as the group moves on, investors can snap up the share for a bargain price. The stock is selling at a P/B value of 0.5 and a forward price-to-earnings (P/E) multiple of 10.2. 

I’d buy the stock for my portfolio of UK shares based on these metrics. However, I should reiterate that this firm’s outlook is tied to that of the oil and gas sector. This sector can be highly cyclical, and so can John Wood’s earnings. As such, the company’s growth is far from guaranteed. 

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Allergy Therapeutics — which produces treatments for people with allergies and immunity disorders — said that operating profit was “strong” during the 12 months to April. And as a consequence it reckons that its bottom-line performance will be “well ahead of market expectations.”

The UK healthcare share said that trading had remained strong despite challenging conditions, with sales helped by a favourable euro exchange rate too. As well, Allergy Therapeutics said that expenses for fiscal 2021 would be lower than predicted. This is due to some commercial projects being pushed back into this year and Covid-19 travel restrictions hitting conference attendances.

For the current financial year Allergic Therapeutics expects net sales “to grow at low single digit levels at constant rates”. The company said that it intends to improve the quality of its product portfolio “by streamlining a number of non-differentiated older products and maintaining focus on short course subcutaneous immunotherapy (SCIT) and innovative allergy treatments.” It predicted that the ongoing coronavirus crisis will impact sales this year too.

Finally the UK share advised that expenses “are expected to increase above the historic long-term trend and above current market expectations.” This is due to those commercial projects being delayed into financial 2022, while higher research and development activity will also hit operating margins.

A sinking UK share

The John Wood Group (LSE: WG) share price hasn’t fared nearly as well as that of Allergy Therapeutics on Thursday. Indeed, the oilfield services provider has slumped 9% during the course of Thursday business.

FTSE 250 firm Wood Group has now moved to its cheapest since last November. It has almost lost all gains printed during the past 12 months, too. The UK engineering share said that like-for-like revenues fell to $3.2bn in the first half. This represents a 21% annual fall and was caused by the ongoing Covid-19 crisis. As a consequence adjusted EBITDA is tipped to fall to between $255m and $265m, down around 12% on a like-for-like basis from the first six months of 2020.

In better news Wood Group said that it had witnessed improving activity momentum during the second quarter. It added that its Consulting and Operations divisions had both moved back into growth between April and June. These units are collectively responsible for 60% of group turnover.

These improved performances helped the group’s order book improve to $6.9bn as of the end of May. This was up around 6% from December levels.

Wood Group expects trading activity to remain lower year-on-year over the course of 2020. But it anticipates a “stronger” performance during the second half. The UK share expects to return to growth versus the first half of the year and the final six months of 2020.

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