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John Wood sinks as Jefferies downgrades stock on increasing dividend risk

The broker cautioned that there was “little organic deleveraging” of the firm’s debt pile, which despite falling US$450mln across 2017 and 2018 had relied heavily on the sale of the upstream business of Amec Foster Wheeler for US$225mln
Offshore oil rig
Jefferies said the group's revenue growth would also be challenged going forward as M&A could be held back by the need to cut its debts

John Wood Group PLC (LON:WG.) shares were on the slide in late-morning on Monday after broker Jefferies downgraded the stock to ‘underperform’ from ‘hold’ on the back of an increased risk to its dividend.

In a note, Jefferies said the FTSE 250 oil field services firm’s net loss of US$7.6mln for 2018 was “exactly” in line with its estimates, however it cautioned that there was “little organic deleveraging” of the firm’s debt pile, which despite falling US$450mln across 2017 and 2018 had relied heavily on US$225mln generated from the sale of the upstream business of engineering consultancy Amec Foster Wheeler, which Wood acquired for US$2.2bn in October 2017.

READ: John Wood Group agrees to sell non-core business for US$38mln

This, analysts said, meant dividend risk was increasing as the need to deleverage the group’s remaining debts of US$1.54bn would put pressure on the payouts as it could no longer rely on such large disposals.

Jefferies also cut its target price for Wood to 480p from 550p, saying that while 2018 had seen strong revenue growth of 78% to US$11.03bn in the year, expectations of similar numbers going forward would be “challenged” without more bolt-on mergers and acquisitions (M&A), which in turn could be made more difficult due to the company’s need to cut its debt and maintain a progressive dividend policy.

Analysts also said their cash flow predictions could be pressured by one-off or exceptional items as well as lower growth as disposals and fewer M&As took their toll.

Shares were down 7.8% at 502.8p.

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