UBS Worley - Energy transition project momentum is building...

UBS

Worley - Energy transition project momentum is building Momentum is building in both traditional and transitional energy projectsWorley held its annual investor day showcasing recent developments and project wins linked to its energy transition and sustainability strategy. We have previously estimated (here) that a c.US$115 trillion investment would be required to achieve global net-zero carbon emission targets by 2050. The key takeaway from the investor day was the continued acceleration in key operational indicators that are supporting Worley's earnings growth outlook. We highlight, (1) Headcount is up 7% to 50,900 (vs. Jun-21), (2) Backlog is up 8% to A$15.4bn, and (3) Factored sales pipeline is up 7%. We think the improvement in these lead indicators is being driven by increased energy transition project activity as well as growth in traditional oil & gas markets on global energy security concerns.Key lead indicators to underpin earnings growth into 2H22 and beyondWorley reiterated guidance for improved revenue, earnings and margins in 2H22. We think this will be supported by ongoing momentum in key lead indicators such as headcount, backlog and the bid pipeline. We continue to forecast FY22 EBITA growth of 18% to A$555mn (vs. VA consensus A $547mn), which implies 2H22 EBITA growth of 21% (vs. 1H22). We note that higher margin Sustainability-based projects now represent c.32% of Worley's revenues, which Worley hopes to lift to 75% in five years with ongoing growth in the backlog and bid pipeline. Importantly, Worley has secured over 2,200 new Sustainability projects this year, with 70% of this work at the FEED/feasibility stage, which should convert to large scale design and delivery projects in the near future.Buy. An Energy Transition winner offering a 10-year EPS CAGR of 10%We are Buy-rated on Worley, with the stock offering significant earnings leverage to a potential four- fold increase in global energy investment and decarbonisation projects (see here), which we think will drive a 10-year EPS CAGR of 10%. We continue to see an attractive valuation, with the stock trading at 19x FY23 P/E (UBSe). Our A$16.40 PT implies a FY23 P/E of 21x, which is below the 23x average the stock traded through the early stages of the last oil & gas related energy investment up-cycle (2004-12).Valuation: 12m price target A$16.40p/sh
Our A$16.40 PT (was A$14.40) increases on the back of c.3% upgrades to our FY23/24 EPS forecasts, valuation roll forward, and the mark-to-market of target multiples. Our PT is based on an equal weighted average of our DCF and EV/EBITDA valuations.