##{"id":59587,"date":"2012-03-01T12:41:22","date_gmt":"2012-03-01T01:41:22","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/03\/01\/upside-priced-in-for-worley\/"},"modified":"2012-03-01T12:41:22","modified_gmt":"2012-03-01T01:41:22","slug":"upside-priced-in-for-worley","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/03\/01\/upside-priced-in-for-worley\/","title":{"rendered":"Upside Priced In For Worley?"},"content":{"rendered":"

\n\t – WorleyParsons<\/span> interim disappoints
\n\t – Earnings estimates trimmed
\n\t – Solid growth outlook appears priced in at current levels<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tWorleyParsons<\/span> ((WOR<\/span>)) delivered a strong revenue result for the six months to the end of December, the group recording an increase relative to the previous corresponding period of 17%. Earnings were unable to follow suit however, falling a little short of market expectations due to lower hydrocarbon margins.<\/p>\n

\n\tIn the view of Credit Suisse some of this margin pressure was due to project-related issues, so there may be some improvement as these underperforming projects are completed in the current half. <\/p>\n

\n\tThe other disappointment in the interim result of WorleyParsons<\/span> was weak cash flows, which declined by 49% relative to the previous corresponding period. Citi<\/span> attributes this to an increase in working capital and increased incentive payments, as well as slower client payments. An improvement is expected in the June half.<\/p>\n

\n\tDespite the cash flow and margin issues, management at WorleyParsons<\/span> has re-affirmed guidance for good growth in underlying earnings in FY12<\/span>. This means revisions to broker earnings estimates across the market have been relatively modest.<\/p>\n

\n\tAs an example, Citi<\/span> has trimmed its full year earnings per share (EPS) estimate by 4.1% to144.6c, while its FY13<\/span> forecast is essentially unchanged at 181.7c. UBS has made similarly small changes this year, its EPS estimate declining to 143c<\/span> from 145c<\/span> previously. <\/p>\n

\n\tConsensus EPS forecasts for WorleyParsons<\/span> according to the FNArena<\/span> database now stand at 148.9c for FY12<\/span> and 182.8c for FY13<\/span>. This compares to the 120.6c achieved in FY11<\/span>.<\/p>\n

\n\tCurrent EPS forecasts suggest WorleyParsons<\/span> should enjoy solid earnings growth through FY13<\/span>. As Citi<\/span> points out, this reflects ongoing increases in global oil and gas exploration and production capex<\/span>, mining capex<\/span> and new contract wins for WorleyParsons<\/span>. These contract wins have contributed to increases in staff numbers, a trend UBS expects will continue. <\/p>\n

\n\tThe issue for the market is that these growth expectations appear priced into WorleyParsons<\/span> at current levels. On UBS's numbers the stock is trading on earnings multiples of 20.7 times this year and 17.6 times in FY13<\/span>.<\/p>\n

\n\tThis suggests limited valuation appeal, as UBS notes the FY12<\/span> multiple is a 53% premium to the domestic market and a premium of around 30% to selected global peers. As a result, UBS retains a Neutral rating.<\/p>\n

\n\tCredit Suisse and Citi<\/span> have matched this rating even with an increased price target from the latter of $29.95, up from $28.28 previously. The consensus price target for WorleyParsons<\/span> according to the FNArena<\/span> database is $28.86, an increase from the previous consensus target of $28.45.<\/p>\n

\n\tOverall the database shows WorleyParsons<\/span> is rated as Buy once, Hold five times and Sell once. The latter is courtesy of JP Morgan (on a sector-relative basis), who expects the interim earnings miss and somewhat uninspiring guidance from management for the full year will result in cuts to consensus numbers.<\/p>\n

\n\tAssuming this plays out JP Morgan sees the share price of WorleyParsons<\/span> coming under some pressure, particularly given the already full multiple on which the stock is trading.<\/p>\n

\n\tShares in WorleyParsons<\/span> today are slightly weaker and as at 12.10pm the stock was down 6c<\/span> at $29.31, which compares to a range over the past year of $21.13 to $33.61. The current share price is broadly in-line with the consensus price target in the FNArena<\/span> database.<\/p>\n

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