Sales Growth Rate
John Wood Group is a multinational company and operates in the energy services Industry. Primarily, the company is headquartered in the Aberdeen, United Kingdom, but the operations are spread in various countries across the globe. The company make available a range of activities to oil and gas and energy sectors worldwide like engineering, maintaining management services, and supporting production. The company has grown year by year significantly to function in more than 60 countries and employed more than 25000 employees (John Wood Group PLC, 2018).
Sales growth rate analyses the volume of average sales grown from year to year (Henriques and Sadorsky, 2011).The growth rate of John Wood Group PLC has shown a significant fluctuation over the past years. The reasons for this fluctuation were related to the fluctuation in the industry as well. From the above table of sales growth rate, it is seen that in the year 2012, the revenue of the company was nearly USD 6,828 million. Than in 2014, the growth rate increased because there was an economic growth in the oil industry and unemployment was also decreased. (Pettinger, 2017). In the year 2015, the sales decreased and there was substantial decline in the growth rate from 8% to -23%. It was seen that this was due to the impact of the prices of oil dropped leading to decline of short term investments in the oil industry.
|
Sales Growth Rate |
||
|
Year |
Sales ($m) |
Growth rate |
|
2012 |
6,828 |
|
|
2013 |
7,064 |
3% |
|
2014 |
7,616 |
8% |
|
2015 |
5,852 |
-23% |
|
2016 |
4,934 |
-16% |
|
(Annual Report, 2016) |
Table 1: Sales by years
The asset turnover ratio measures the capability of the company to generate revenue by deploying its assets effectively and efficiently. From the below figure, it can be seen that John wood Group Plc competitors had enough assets to sustain positive growth. However, the company was not able to maintain assets.
The possibility where a business can have lower profits than the expected ones is generally called as business risk. It is directly affected by the operating profits of the company. Operating profit margin is a profitability ratio which helps to measure the amount of revenue left after deducting all operating cost and thus indicating the degree of business risk. The decisions of creditors and investors are based upon this ratio as it gives a picture of how profitable a company’s working are and creating value for shareholders (Knight, 2012). However, business risk is also affected by the level of debt in the capital structure of the company. Wood Group’s debt-to-equity ratio is 42.1% indicating not a strong performance of the company. Therefore, in June 2017, John Wood Group PLC has an operating margin of 4.74% (Yahoo Finance, 2018). Apart from that, the joint ventures of the company made a major contribution in the company’s total revenue and earnings before income and tax. A high turnover indicates a healthier state of affairs of the company (Gibson, 2011).
Asset Turnover Ratio
From the above figure, it can be seen that after 2014, all the competitors of John Wood Group except Petrofac Ltd, faced a decline in their turnover including the company itself.
The above figure shows that after 2014, operating profit of National Oilwell Vacro, Halliburton Co. and Petrofac ltd. has become negative. Whereas, John Wood and Schlumberger Ltd were able to keep their profits positive in that situation. Although in 2016, John Wood’s profits reduces to a high extent but the figures remain positive.
Financial risk arises from the loss faced by the company. It has a major impact on the shareholders as they interested in getting higher returns from the funds they invest. A combination of debt and equity is needed to increase the shareholder value of the company when company make large profits. It is easy for a company to increases its shareholders’ value of it makes positive net profits.
From the above graph it is depicted that the net profits of John Wood Group PLC and Schulmberger Ltd. were positive after 2014, while all the other competitive entities faces a negative trend in their profits. Having positive net profits in the last five years means John Wood is able to increase the value of its shareholders. Also the year which highlights financial risk is 2014, because after that most of the companies made negative profits. Thus, John Wood Group PLC faces less financial risk from its competitors. This also indicates that it has high a financial leverage that means the use of debt funds is more by the company. This creates an unfavourable financing position for the business.
As it is stated above, the financial risk is also affected by the capital structure of the firm. John Wood as a debt ratio of 42.1% which means company’s operations are more financed by debt rather than equity.
Net Debt helps the company to know its overall financial health by paying off all its total debt if they become due immediately using its cash and liquid assets. It also helps the shareholders and experts to know whether the company is over or under leveraged (Lambrecht and Pawlina, 2012). However, the company has faced several difficulties from the past years; in 2016 it is able to meet its expectations in terms of financial performance.
The systematic risk also known market risk or un-diversifiable risk is the risk which affects the company’s stocks, assets and the industry. Systematic risk can be impacted by various macro factors in the market such as recession, inflation, government policy and others. Therefore, beta is used to measure the systematic risk. (Prasanna, 2013). The value of beta is measured in terms of one. However, firm faces a higher systematic risk if beta is greater than one and vice-versa. Therefore, John Wood Group PLC has a beta of 0.7514 (Ft.com). A positive beta indicates that it has a direct relation with the market. It means that when the market shows rising trend, the price of the company’s stock also rises and vice versa but the stock volatility differs from the market volatility.
Business Risk and Operating Profit Margin
Operating Leverage
Operating leverage analyses the total fixed cost of the firm. John Wood Group PLC faces high operating leverage as it is engaged in heavy equipment’s. The fixed costs are all the fixed expenditure like salary, rents and other administrative expenses. Hence, the company has high DOL and volatile earnings in the past years.
Financial Leverage
Degree of financial leverage measure the amount of debt the company uses over the equity. The company will have a high financial leverage if its uses more debt. Therefore, this also increases the burden of repayment of debts along with their interest on the maturity date affecting the company’s EPS.
|
Financial Leverage (%) |
|
|
Year |
Financial Leverage |
|
2012 |
1.87 |
|
2013 |
1.89 |
|
2014 |
1.72 |
|
2015 |
1.7 |
|
2016 |
1.84 |
|
(Morningstar, 2018) |
Table 2: Financial Leverage
The above table shows the financial leverage of John Wood Group PLC over the last five years. In the year 2012, the company had a leverage of 1.87. In the year 2016, it decreased to 1.84 thus, reducing the financial risk of the company.
Performance Visibility
Visibility of company’s performance is another factor that indicates its systematic risk. The beta of the company is directly influenced by the level of transparency kept by the firm in its financial reports, management process and performance. John Wood Group has make its shareholders aware about its strategies and performance in the last five years. This increases the reliability as well as kept the beta of the company lower than its competitors.
Return on assets is a significant profitability ratio to measure the return earned by the company from its investment in assets during a period. A high return on assets indicates a favourable situation (Saleem and Rehman, 2011).John wood group PLC is a public company so the return on assets is majorly dependent on the industry.
|
Return on Assets (%) |
|||||
|
|
2012 |
2013 |
2014 |
2015 |
2016 |
|
John Wood Group PLC |
6.39 |
6.8 |
7.21 |
1.87 |
0.69 |
|
Petrofac Ltd. |
12.36 |
10.33 |
1.48 |
-3.99 |
0.01 |
|
Schlumberger Ltd. |
9.4 |
10.47 |
8.12 |
3.07 |
-2.31 |
|
National Oilwell Varco |
8.74 |
7.02 |
7.32 |
-2.55 |
-10.08 |
|
Halliburton Co. |
10.32 |
7.5 |
11.39 |
-1.94 |
-18.03 |
Table 3: Return on Assets
The above table shows the Return on asset of John Wood Group PLC and its major Competitors in the last five years. It is indicated that in the year 2012, the return on assets of John Wood Group PLC was 6.39%. And in the subsequent years it increased to 6.80%. This increase in the ratio was affected by the acquisition of Swaggart Brothers for providing services like civil construction and fabrication to the company. After that in the 2016, there was a substantial fall in the ratio to 0.69%. This fall was led due the decrease in the revenue of the company gradually as the investment in the new assets does not provide returns in the starting years of operation. The decision to acquire its biggest competitor Amec Foster Wheeler also lowered the return on assets. In addition to that, the company was also expanding its operations during this period which led to increase in its expenditure.
Debt Ratio, Net Debt, and Financial Risk
Return on equity evaluates a company’s profitability and tells that how much amount of profit is generated from the shareholders’ investment. From the point of shareholders, it is important as they need a good return from their investments. High return on equity means that the company is using its funds efficiently (Saleem and Rehman, 2011).
|
Return on Equity (%) |
|||||
|
|
2012 |
2013 |
2014 |
2015 |
2016 |
|
John Wood Group PLC |
12.26 |
12.77 |
13 |
3.2 |
1.21 |
|
Petrofac Ltd. |
47.52 |
36.74 |
6.23 |
-22.58 |
0.09 |
|
Schlumberger Ltd. |
16.63 |
18.14 |
14.07 |
5.64 |
-4.4 |
|
National Oilwell Varco |
13.16 |
10.96 |
11.66 |
-4.15 |
-15.91 |
|
Halliburton Co. |
18.2 |
14.48 |
23.45 |
-4.23 |
-46.34 |
Table 4: Return on Equity
From the above table in it shown that in the year 2012, the return on equity of John Wood Group PLC was around 12.26%. In the subsequent years it increased to 13%. Since then the return on equity is gradually declining and in 2016, it was recorded as low as 1.21. This was due to the fact the in these years the revenue also decreased. The year 2014, also saw a major change in board structure and several miscellaneous expenditure which led to the decrease in return to equity ratio.
John Wood Group PLC faced several types of risks in the past years. Operational risk is a significant risk in the oil and gas industry. John Wood Group PLC faces operational risk as it deals with various different heavy equipment’s. This heavy equipment’s used requires proper safety measures so that the human resource working on these machineries are not harmed and injured disrupting the work flow. To mitigate it, the company has taken the help of Information technology, sensors and advanced analytics to detect equipment breakdown (Roberta, 2013). The company in its goals also assures that the asset provided to human resource is safe and secure (John Wood Group PLC, 2018). Customer audits are done for several operations of the company. Various programs including insurance programs, incentive plans, and training and development were implemented to reduce it. In addition to that, to measure carbon footprint, the company has also launched a pilot program. Further to protect the human and environment various safety measures and compliance policies are taken up by the company. In the year 2014, the company employed Nina Schofield as the head of health, safety, security and environment (HSSE) to develop and implement the strategies of (John Wood Group PLC, 2018). However, this risk is not diversifiable i.e. it cannot be removed completely (Cruz, 2002).
Another risk is the market risk which arises from the fluctuation in the market prices. This risk cannot be eliminated completely by diversification but it can be hedged against. John Wood Group PLC has operations in different countries, so the company faces this risk as well but its degree differs from country to country. Trading around the globe with different companies, a good management team is required to keep a record of all overseas investment and hedge against the risk in these investments. To reduce the market risk, the company has also developed good customer relations which have helped to lead the market in several areas. A comprehensive analysis and due diligence is done prior to any acquisitions or investment plans.
Systematic Risk
Therefore, to increase the sales growth rate, the company is planning various approaches to retain and recruit the talent. However, the asset turnover ratio of the company is decreasing and in order to increase it the company is focusing on to increase its inventory management and efficiency. To improve this ratio the company is focusing to increase sales and improve the collection of its account receivables. Also to increase its operating profit John Wood Group PLC is facing the industry challenges effectively and efficiently along with building strong business relationships.
In addition to this, the debt ratio and net debt of the company is also analysed to see their impact on the capital structure and financial health of the company. It is seen that the debt ratio has increased recently, providing more financial risk and more interest payment to the company. To control this, the company is majorly focusing on the earnings and liquidity as the debt is not as major issue to the company.
The beta measured from the above analysis comes out to be negative which means that the company should insure its economic risk in advance. The return on assets and return on equity is also decreasing. In 2016, despite all challenging situations John Wood Group PLC managed to provide with good financial performance in an oil & gas market.
The cost of capital of the company is evaluated using its Weighted Average Cost of Capital (W.A.C.C.). The WACC helps to predict the average return from its investments. A company is basically financed through a mix of debt and equity. The debt is calculated on its market value and to calculate cost of equity, Capital Asset Price Model (CAPM) is used.
|
Cost of Equity |
|
|
Risk Free rate |
1.43% |
|
Market Return |
31.83% |
|
Beta |
0.75 |
|
CAPM |
24% |
Table 5: Cost of Equity
The formula of CAPM is – risk free return + beta (market return – risk free return).. In simple words, it indicates the rational value of the investment. The cost of equity using beta and risk free rate and market return comes out to be 24%.
|
cost of debt |
|
|
Interest Payment |
31 |
|
Debt |
764 |
|
Cost of debt |
4% |
|
Tax Rate |
25% |
|
Cost of Debt (after tax) |
2.84% |
Table 6: Cost of Debt
Cost of debt tells the rate at which the company pay its current debt. The cost of debt comes out to be 2.84%.
|
WACC |
Capital Amount |
Cost of capital |
% of portion |
WACC |
|
Equity |
2195 |
24% |
0.74 |
18% |
|
Debt |
764 |
2.84% |
0.26 |
1% |
|
Total capital |
2959 |
WACC |
19% |
Table 7: Weighted Average Cost of Capital
This model helps to know the expected return on the investments made by the stakeholders. Therefore, the WACC of the company comes out to be 19%.
Net asset value approach also known as the intrinsic method is the per Share value of the company at a specified period (Damodaran, 2012). In this method the net assets are divided by the number of shares to get price per share. Further, this approach emphasizes on the difference between these two values. Therefore, the market value has a higher value than accounting value. Thus, the formula is-
Factors Affecting Systematic Risk
NAV = (assets – liabilities) / number of outstanding shares
|
Net Asset Value |
|||||
|
Year |
Total Assets ($m) |
outside liabilities($m) |
Net Worth |
Shares Outstanding |
Net Asset Value |
|
2016 |
4030 |
1834 |
2196 |
667.7 |
3.29 |
Table 8: Net Asset Value
In context with John Wood Group PLC, the net asset value per share of the company is overvalued. The current per share price of the company is 603.40. Thus from this analysis it is concluded that the investors should sell their shares.
The dividend valuation method computes the value per share by using the expected dividend and then discounting it back to the present value with required rate of return (Hurley and Johnson, 1994).Its formula is:-
DDM= Expected Dividend
Required rate – growth rate
It assumes that the growth rate of dividend is either constant or changes during the period. Therefore, the constant dividend model evaluates the fair price of the stock by the formula, Price = Dividend / (cost of capital – Growth rate).
|
Dividend Valuation Model |
||
|
Expected Dividend |
8.9 |
|
|
Growth Rate |
4.32% |
|
|
Required Rate of Return(Ke) |
4% |
|
|
Intrinsic value |
-11,363.19 |
|
|
Dividend growth rate |
||
|
2016 |
8.179 |
|
|
2017 |
8.532 |
4.32% |
Table 9: Dividends
In context with John Wood Group PLC, the expected dividend of the company will be $8.9m with a growth rate and required rate of return of approximately of 4% and 10% respectively. In the year 2017, the intrinsic value of shares comes out to be $-11,363.19 million. So, the shares are undervalued and the investors should buy their shares in the market.
The price earnings ratio values company’s current price of the share in relation to per share earnings. Therefore, it analysis the situation of what market is ready to pay for the earnings of the company. A bullish market is suggested with a higher PE ratio and a not so bullish market is suggested with a low PE ratio. The ratio can be calculated as: – PE ratio = Stock Price/Earnings per share (Anderson, 2012). In context with John Wood Group PLC the current price earnings ratio is 157.55 excluding extraordinary items and -358.97 including extraordinary items (Market Watch, 2018).
In 1980’s, Rappaport along with other consultants developed the idea that businesses main objective is to increase the shareholder’s value. This model helps the shareholders to analysis the impact of their decisions on the Net Present Value (NPV) of cash of the company. Therefore, the company should be able to earn more than its opportunity cost by undertaking good investment opportunities. This valuation model is forward looking model giving a view of long term impacts to the company (Rappaport, 1999).
The standard corporate UK tax rate is been taken as 20%. Calculation is been done for the incremental change in capital investment and working capital. The planning horizon for the model is 5 years and WACC is taken as a required rate of return. The shareholder value is 1266 billion pounds and the market closes at 4297 billion. This means that the John Wood’s market value is overvalued by 239.42% as suggested by the Rappaport’s model.
The major projects and acquisitions undertaken by john wood group PLC in September 2000, was acquiring Mustang Engineering Inc., which has its operations in engineering. Later in 2011, John Wood Group PLC acquired PSN for growing and maintaining its operations offshore. On May 2013, John Wood Group PLC acquired Intetech Limited (“Intetech”), for integrating and managing corrosion in the global oil and gas sector. This acquisition strengthens the business software portfolio. Further, On October 2013, a joint venture between John Wood Group PLC and Siemens AG (“Siemens”) took place. This was done to provide aftermarket gas turbine, designing of generator, and repair services. The board of John Wood Group PLC believed that this joint venture will help in the progress of future gas turbine activities. It was also expected that this joint venture will provide $15m in annual net synergies and increase the revenue to $1m to the company (John Wood Group PLC, 2018).
In recent, the company acquire its rival company Amec Foster Wheeler at an approximate value of £2.2 billion. This agreement will generate a collective value of about euro 5 bn. From this acquisition John Wood Group PLC have expanded its product lines in US and hopes a reduction in cost around euro 110m. The total revenue of John Wood Group PLC went down to $2.28bn. In the first year of the acquisition the performance of the company was not up to the expectation. But in the second half a stronger performance is predicted. John Wood Group PLC considers that this acquisition will effect in major growth opportunities and will increase cost synergies of at least $ 134 million. Apart from this, the management expects that the acquisition will bring the core earnings to around $600 million (Reuters, 2017).The benefit of this acquisition to John Wood Group PLC is that shareholders of Amec Foster Wheeler will not be entitled to any dividend before the effective date. This arrangement will generate the scope of services across engineering, construction, maintenance, and operations market. The workforce will increase to 64,000 and John Wood Group PLC will rank amongst the top 15 oil and gas companies across the globe. The previous acquisition of the company has been successful so it is expected that this acquisition will also increase shareholders value even in the recession (John Wood Group PLC, 2018).
In the last five years, John Wood Group PLC has shown a fluctuation in the dividend declaration and faces an adverse payout ratio indicating that it is making loss and using its retained earnings for paying dividends (Carroll, 2018). Regardless of this, the amounts of per share have increased. Even though the company has a yield of 3.37%, in the market of top dividend payers it is still below (Morningstar, 2018). Considering all these factors, john wood group is a complicated choice for investors. The dividend investors need to clearly understand the company’s core business and then take the decision to invest or not (Simply Wall st, 2018).
In the year 2012, the total dividend paid by the company was $0.17 with a dividend yield of 1.70%. In the next year the dividend amount and dividend yield increased to $0.22 and 2.30% respectively. In the subsequent next two years there was an increment in the amount of dividend and dividend yield both. So in 2014 and 2015, the dividend paid was $0.28 and $.30 respectively. And in these years the dividend yield went up to 3.30% and 3.60% respectively. In the year 2016, the total dividend paid by the company was $0.33 with a decrease in dividend yield of 2.70% (Hargreaves Lansdown, 2018). In this year, the dividend cover ratio is 1.9 times 2.8 times in the previous year.
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