PFC v Wood Group31 Jan 2021 12:48
Not even a fifth of Wood Group’s market value
Petrofac’s circa £350 million market value should be compared to fellow mid-sized company Wood Group (LSE:WG.) at £1.9 billion, yet their fundamentals are not so dissimilar.
Towards the end of last year, Petrofac had a $5.1 billion order book versus $6.2 billion for Wood. Their 2021 projected net profits stand at $65 million and $163 million respectively, also net debt at $422 million versus $1.7 billion.
Both companies have guided expectations lower as the pandemic reduced energy demand, hence compromised industry activity. But if short sellers’ rationale is for serial downgrades of order books, it is possible this meets with an inflection point in 2021, at least in terms of expectations. A total of 2.6% of Wood’s share capital is out on loan, but given its market cap differential with Petrofac, is actually a greater down-bet (although Wood has greater liquidity).
Petrofac suspended its dividend last year. But, in the first half, it made £18 million net profit before deducting £95 million exceptional items. So, consensus forecasts for £43 million normalised net profit in 2020 and £66 million in 2021 look fair.
This implies a price-to-earnings (PE) ratio of 6x falling to near 5x based on earnings per share (EPS) of 17p and 20p respectively. If representing ‘trough earnings’, however, this is a very cheap PE. A quality cyclical stock could command over 20x in anticipation of recovery. Wood’s prospective PE is over 15x.
Moreover, Petrofac’s net tangible assets per share are around 200p, offering comfort to shareholders. Wood’s asset base is grossly distorted by goodwill/intangibles, which represent 145% of net assets.
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