Sparta open letter to Wood Group23 Mar 2023 17:26
Is this the kind of open letter THG a will receive on Sparta crossing 3% ?
Ovs different slant to dividends and buy backs but it’s resulted in 3rd parties bidding for the business
Snippit
(1) 100% near term upside
Wood Group is substantially undervalued both intrinsically and versus its global peers. Whether analysed in relative or absolute terms, it is our view that the shares offer well over 100% upside in the near term.
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(2)
Wood's balance sheet is fit for purpose with significant excess capital
Your operational and financial risks are radically changed for the better. You can afford to run the business at the top end of your stated 0.5x – 1.5x EBITDA[13] target leverage range without undue risk to the investment case.
As we illustrate below, on your own guidance,[14] running at 1.5x ND/EBITDA generates c.$70m of headroom by the end of this year, c.$115m in 2023 and over $270m in 2024. Cumulatively you could therefore buyback a quarter of your current market capitalisation by the end of 2024 and still sit within the conservative leverage targets that have been set for the business.
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(3)
The scene is set for Wood to show that it cares about its long-suffering shareholders
At the CMD you have set out a compelling case for the business. With this wealth of information now public, you have provided the perfect backdrop to reset your capital allocation priorities and deploy a buyback
As we advised in our discussions, we strongly believe that nothing will affirm your belief in "New Wood" and its ability to generate steady operating cash, more than putting some of that cash to work in buying back your own shares. We have shown that in our view, you generate over $270m of surplus capital by Dec-24; putting even a portion of this to work in short order via a buyback is highly accretive and makes good business sense. Furthermore, the signalling impact of any such action cannot be underestimated:
i) It robustly underscores your belief, evident at the CMD, that Wood is now operationally and financially on a strong footing;
ii) You enjoy structural tailwinds in your business which along with your order book, de-risks your outlook;
iii) With your shares trading at a c.50% discount to peers,[18] with your organic investment needs already prioritised, it is manifestly a highly accretive capital allocation course to pursue; and
iv) It would return some stability to your share price reducing Wood's beta from its currently unwarranted 1.7.[19] Using a beta of 1.7x delivers a DCF fair value of c.235p, vs a fair value of c.330p using a beta of 1.3, an improvement of over 40%.[20]
We would like to continue our discussions with you, the CEO and the CFO at the earliest possible opportunity.
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