##{"id":60604,"date":"2012-09-20T13:47:49","date_gmt":"2012-09-20T03:47:49","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/09\/20\/is-worleyparsons-overvalued\/"},"modified":"2012-09-20T13:47:49","modified_gmt":"2012-09-20T03:47:49","slug":"is-worleyparsons-overvalued","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/09\/20\/is-worleyparsons-overvalued\/","title":{"rendered":"Is WorleyParsons Overvalued?"},"content":{"rendered":"

\n\t – Moelis<\/span> reiterates Sell rating on WorleyParsons<\/span>
\n\t – Stock viewed as expensive relative to peers
\n\t – Premium not justified by falling margins
\n\t – Earnings visibility also poor<\/strong><\/p>\n

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

\n\tThe share price of WorleyParsons<\/span> ((WOR<\/span>)) is strongly correlated to the oil price, as Moelis<\/span> notes around 68% of group revenue is derived from work in the hydrocarbon sector. The oil price doesn't directly impact on revenues, but does have an impact on activity in the sector and the level of capital investment.<\/p>\n

\n\tGiven this, Moelis<\/span> struggles to justify the current earnings multiple on which WorleyParsons<\/span> trades, as the broker's numbers suggest the current share price is a 27% premium relative to median multiples for peers.<\/p>\n

\n\tAs Moelis<\/span> notes, consensus expectations in terms of earnings per share (EPS) growth for WorleyParsons<\/span> stand at an increase of 17.5% in 2013, broadly in line with the industry median of 18.5%.<\/p>\n

\n\tThis is where the valuation issue comes in, as Moelis<\/span> points out WorleyParsons<\/span> is trading on a premium of about 27% to the sector's median earnings multiple for 2013 of around 11.7 times. This is despite evidence of margin erosion in recent years.<\/p>\n

\n\tThis fall in margins reflects the move by WorleyParsons<\/span> away from pure design to broad based EPCM<\/span> (engineering, procurement and construction management) or project management contracting. Moelis<\/span> points out the broader-based work tends to attract lower margins.<\/p>\n

\n\tAs margins have come down for WorleyParsons<\/span>, Moelis<\/span> notes top-line growth is now similar to peers, which suggests to Moelis<\/span> the current multiple premium for the stock is unjustified. This is highlighted by the fact Moelis<\/span> has a price target on the stock of $24.50, well below the current share price of more than $27.00.<\/p>\n

\n\tThe other issue with WorleyParsons<\/span> in the view of Moelis<\/span> is earnings visibility, as the company has not disclosed its backlog of work. In general, Moelis<\/span> expects capital expenditure by major oil and gas companies will continue to grow, but not at the same rate as in previous years. This implies lower earnings growth for WorleyParsons<\/span>.<\/p>\n

\n\tAssuming the current earnings multiple for WorleyParsons<\/span> will consolidate under such an operating environment, Moelis<\/span> retains a Sell rating on the stock given the current multiple premium to peers. The only broker in the FNArena<\/span> database to agree is JP Morgan, who also rates WorleyParsons<\/span> as Underweight on valuation grounds within the sector.<\/p>\n

\n\tIn total the database shows WorleyParsons<\/span> is rated as Buy twice, Hold five times and Sell once, with a consensus price target of $27.83. Targets range from JP Morgan at $24.01 to Macquarie at $31.40.<\/p>\n

\n\tThe Buy argument is supported by both Macquarie and BA Merrill Lynch. Macquarie sees upside from potential margin expansion and new contract wins, while BA-ML is attracted to a balance sheet that is rapidly being de-geared.<\/p>\n

\n\tRBS<\/span> Australia's Hold rating is supported by the view there is some downside risk for the WorleyParsons<\/span> share price form overly bullish consensus earnings forecasts being revised down in coming months.<\/p>\n

\n\tDeutsche Bank also rates WorleyParsons<\/span> as a Hold for reasons similar to those of Moelis<\/span> in that the broker doesn't expect margins will return to the peak levels enjoyed in recent years. Citi<\/span> suggests the stock is fully valued at current levels.<\/p>\n

\n\tHaving traded in a range of $19.95 to $30.09 over the past 12 months, shares in WorleyParsons<\/span> as at 1.15pm today are unchanged at $27.31 in a weaker overall market. The current share price implies upside of around 2% relative to the consensus price target in the FNArena<\/span> database. <\/p>\n

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\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"