Investments In Carbon Capture And Blue Hydrogen Will Drive Future Success

Key Takeaways

• Strategic investments and scalable cost structures drive earnings growth, with an emphasis on margin expansion and robust revenue potential in diverse sectors.
  
• A significant share buyback indicates confidence in financial strength and supports EPS growth through optimized capital allocation.
  
• Project cancellations and macroeconomic uncertainties threaten revenue stability and growth, with energy transition dynamics further risking long-term revenue streams and earnings targets.

Catalysts

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

• The focus on margin expansion and strategic investments suggests Worley is poised for earnings growth, even in a challenging environment, with an emphasis on delivering high single-digit EBITA margins and targeting a double-digit EBITA compound annual growth rate.
  
• The company's emphasis on scalable cost structures and process improvements aims to underpin future revenue growth and enhance net margins, supporting their strategic transformation goals.
  
• Worley's diversification across sectors and geographies, coupled with their agility to move resources according to customer needs, positions them for resilient revenue streams and margin improvements in both traditional and sustainability-related markets.
  
• Strategic growth investments in areas like carbon capture, storage, and blue hydrogen are expected to deliver accretive returns, boosting future revenue potential in high-growth sectors.
  
• The announced $500 million share buyback reflects the Board's confidence in Worley's financial position, expected to drive EPS growth by optimizing capital allocation amidst a strong financial outlook.

Worley Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Worley's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 4.1% in 3 years time.
• Analysts expect earnings to reach A$581.0 million (and earnings per share of A$1.12) by about April 2028, up from A$380.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, up from 15.9x today. This future PE is greater than the current PE for the AU Construction industry at 15.5x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.76%, as per the Simply Wall St company report.

Worley Future Earnings Per Share Growth

Risks

• The cancellation of the Northvolt Battery Materials project led to a decline in backlog, highlighting potential revenue volatility due to project cancellations.
  
• A marginal decline in the factored sales pipeline suggests potential challenges in maintaining future revenue growth.
  
• The persistent uncertain macroeconomic environment and geopolitical dynamics may impact investor confidence and could affect future revenue and earnings.
  
• The energy transition's pace and shifting capital allocation by customers indicate potential risks to long-term revenue streams as sustainability project economics undergo increased scrutiny.
  
• A moderated year for FY '25, as mentioned, might signal potential risks to achieving aggressive growth targets, impacting net margins and earnings expectations.

Valuation

• The analysts have a consensus price target of A$17.809 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$14.1 billion, earnings will come to A$581.0 million, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 7.8%.
• Given the current share price of A$11.55, the analyst price target of A$17.81 is 35.1% 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.