Questor: Wood Group is one ‘falling knife’ we won’t be trying to catch. Avoid

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The company’s disappointing financial performance is a key reason for its dwindling share price.

Covid has caused significant disruption for the business. The pandemic contributed to a 24pc decline in revenue in the 2020 financial year as major projects were delayed in response to an uncertain economic environment.

This trend persisted in 2021 and caused Wood Group’s first-half revenue to fall by 23pc compared with the same period of the previous year. More recently, its latest trading update included a downward revision to revenue and profit expectations compared with those provided at the halfway stage of its 2021 financial year.

Previously, at the time of its half-year results, it had forecast full-year sales of between £4.9bn and £5bn as well as an “Ebitda” (earnings before interest, tax, depreciation and amortisation) margin of 8.8pc. 

However, thanks to the ongoing deferral of activity and contract awards in its end markets, the company now expects revenues of £4.7bn and an Ebitda margin of 8.6pc for the full year.

In addition, it now expects net debt to be higher than previously forecast. The company forecasts that it will end the year at the same level that was reported in its half-year results. A further update on its performance is due on Thursday.

In Questor’s view, further uncertainty could be ahead for the energy industry. Rises in inflation, which recently reached a 30-year high in America and a 10-year high in Britain, are likely to nudge central banks towards a less accommodative monetary policy.

This could act as a drag on the global economy’s growth rate, which could lead to further delays across the major projects on which Wood Group consults. Higher official interest rates may also inhibit the pace of transition towards low-carbon assets across the energy sector as businesses’ borrowing costs rise in harmony.

Even if the company delivers on consensus profit forecasts in the 2022 financial year, its price-to-earnings ratio of 20 for that year suggests that its shares lack a margin of safety.

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