UBS has taken a bullish view on John Wood Group Plc (LON:WG) which the Swiss bank reckons is “more resilient than the market thinks”.
Analysts at the bank upgraded Wood to ‘buy’ from ‘neutral’. A new price target is set at 290p, which compares to a market price of 216.5p.
“We are positive on Wood because we think the shares are discounting an earnings decline of 40% from normalised levels, more bearish compared to our average 25% reduction in EBITDA for the periods 2020E-2023,” said UBS analyst Amy Wong.
“Wood group's capital light and flexible cost base are helpful in the current environment to preserver profitability and cashflows as can be seen by its prompt reaction to take US$40m out of its cot base with no cash costs.
“With the generally difficult conditions in the oil field services, Wood's business mix towards more consulting services rather than lump sum turnkey arrangements lends to a lower risk profile.”
Wong added: “As part of Wood's diversification strategy, it acquired some positions in Clean Energy, Environment and Infrastructure spend when it bought AmecFW in 2017.
“These businesses, in our view, should benefit from the expected incremental infrastructure investments.”
UBS is expecting Wood’s revenues to fall 17% from last year, while it estimates earnings (EBITDA) margins will return down to previous lows of around 6%.
“For context, this is a steeper cut to the 2008-09 global financial crisis where revenues were down 5% and rebounded quickly but not as deep as the downturn triggered by the 2014-16 oil price collapse which saw a top to bottom reduction of c50%, mainly because we expect the industry has less scope to cut capex this time around and Wood's business mix is now more diversified,” the analyst added.