Investing In Digital, AI, And Sustainability Projects Will Improve Efficiency And Seize Energy Transition Opportunities

Key Takeaways

• Worley prioritizes high-margin services and sustainable projects, aiming for substantial EBITDA growth through enhanced revenue and net margins.
  
• Investment in digital and AI enhances productivity and efficiency, supporting long-term earnings growth and margin improvements.
  
• Geopolitical tensions, economic factors, and project uncertainties could impact revenue, profitability, and financial goals despite potential growth.

Catalysts

Provides professional services to energy, chemicals, and resources sectors worldwide.

• Worley targets double-digit EBITDA compound annual growth, driven by increasing revenue from higher-margin professional services and sustainable projects. This is expected to enhance both revenue growth and net margins.
  
• Strategic investments in digital and AI, amounting to $30 million in FY '25, aim to improve efficiency and productivity, potentially leading to higher earnings and better margin control over the long term.
  
• Growth in sustainability-related work, which now comprises 56% of the backlog, positions Worley to benefit from the global energy transition, boosting future revenue and earnings in this high-demand sector.
  
• Strong capital management, including a potential focus on buybacks or strategic acquisitions with leverage reduced to 1.5x, supports EPS growth, providing opportunities for accretive growth and shareholder returns.
  
• The ability to execute and mobilize global projects flexibly, despite project delays and cancellations, showcases operational resilience and aids in maintaining stable revenue growth and earnings progression.

Worley Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Worley's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 4.0% in 3 years time.
• Analysts expect earnings to reach A$581.6 million (and earnings per share of A$1.11) by about February 2028, up from A$303.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$491.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.5x on those 2028 earnings, down from 25.2x today. This future PE is greater than the current PE for the AU Construction industry at 17.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Worley Future Earnings Per Share Growth

Risks

• Geopolitical tensions and macroeconomic uncertainties could delay or cancel projects, potentially affecting revenue projections and undermining earnings growth.
  
• Scope decreases and project cancellations, such as those experienced with Anglo American's Woodsmith project, can directly reduce backlog and future revenue streams.
  
• High inflation and rising interest rates could increase costs and constrain margins, impacting profitability despite revenue growth.
  
• Challenges in customer capital allocation decisions and energy transition uncertainties may slow project initiation, negatively affecting revenue cycles and margin targets.
  
• The competitive intensity in securing higher-margin work and dependency on macroeconomic factors for margin expansion pose risks to the financial goals.

Valuation

• The analysts have a consensus price target of A$17.312 for Worley based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$22.0, and the most bearish reporting a price target of just A$13.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$14.4 billion, earnings will come to A$581.6 million, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of A$14.45, the analyst price target of A$17.31 is 16.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.