LONDON,
April 16,
2024 /PRNewswire/ -- The full text of the letter
follows:
Sparta Capital Management Ltd
1 Knightsbridge Green
London SW1X 7QA
John Wood Group PLC
15 Justice Mill Lane
Aberdeen AB11
6EQ
Attn: Roy A Franklin, Chair; the Board
of Directors
Cc: Ken
Gilmartin, Chief Executive Officer
15 April 2024
Dear Roy,
Thank you for the many opportunities you have
given us to continue our discussions.
As you know, we have been a significant investor
in Wood Group since early 2022, and like many of your shareholders
we are frustrated by the continued underperformance of the shares.
We are now one year on from the lapsed bid process with Apollo and
17 months since you announced your strategy refresh. Despite the
many operational achievements that you have recorded since then,
your shares languish at 130p - 140p, which, with the exception of
just one occasion in the last five years, are the all-time lows for
the shares.
In the context of this, we believe that the Board
must be realistic on how it can best achieve fair value for
shareholders; if the UK public markets are unwilling or unable to
engage in Wood's story, we believe you should undertake a strategic
review and actively seek alternative solutions. We note, for
example, the recent successful attempts by corporates to move their
primary listing away from markets which they have determined do not
recognise the true worth of their businesses. In particular, the
US, where Wood's peers Jacobs and KBR trade, and where you have
significant operational and executive presence, would seem a
logical potential listing venue. Equally, we have been pleased to
see a significant up-tick in M&A activity in Q1 2024, and
financing markets which appear to be supportive of public to
private transactions.
We have spoken to many of your existing
investors, and there is widespread agreement that something must be
done to address the poor share price performance. As such, we urge
you to conduct a strategic review with an open mind as to the best
way to achieve fair value for shareholders. If you conclude that
shareholder value will be maximised through a sale of the company,
we encourage you to engage with any suitable bidders who may emerge
during this process.
Operational Achievements
It is clear that you have made considerable
progress as a business since the beginning of 2022. The sale of the
Built Environment division, completed in September 2022, was transformative and made
possible, a comprehensive and long overdue root & branch
restructuring of the business. You appointed Ken Gilmartin in June
2022 to lead this process. We believe Ken is a talented
executive who has very quickly implemented the right strategy for
Wood. At the November 2022 CMD, Ken
and the refreshed executive leadership team set out a clear vision
and roadmap:
- Growth - returning the business to sustainable growth
"ahead of" a market estimated to grow at 5%
- Derisking - moving the business away from risky lumpsum
turnkey contracts
- Profitability - addressing central costs and improving
operating margins
- Operating Cash - generating substantial operating
cash
- Legacy Liabilities - retiring legacy liabilities
- Free Cash Flow - generating sustainable free cash
flow
Against this list of objectives, we note the
following very significant successes, with more to follow:
- Growth – in its first full year since the strategy
refresh the business grew EBITDA some 11%(*) and has
guided to 2024 EBITDA growth towards the upper end of its
medium-term target and for 2025 EBITDA growth to exceed its
medium-term target of mid to high single digit percentage
growth annually(1)
- Derisking – lumpsum turnkey contracts now represent only
a negligible portion of the total revenue, versus 16% in FY
2021(1)
- Profitability – after a year of investment in 2023 with
margins flat on 2022 as guided, margins are now expected to expand
significantly as the business continues to grow, shifts towards
higher margin consulting projects and benefits from cost savings
initiatives(1). As a consequence, analysts estimate that
EBITDA margins will expand to 7.5% and 8.1% for 2024 and 2025
respectively(2) from 7.2% in 2023
- Operating Cash – over 2023 the company generated a
dramatic positive inflection in operating cash, generating
$194m of operating cash for the year,
versus an outflow of $66m in
2022(1). The company is on course to achieve a further
improvements, with operating cashflow set to grow to $355m(2) by 2025 according to
consensus estimates
- Legacy Liabilities – the company has retired some
$145m(3) of legacy
obligations in 2023, with the final amount of $70m(4) being retired in H1 of
2024.
In total, some $362m(5)
of liabilities faced by the group at the time of the CMD in 2022,
equivalent to approximately 1/3rd of the group's current
market capitalisation, have been permanently retired
- Free Cash Flow – as guided at the time of the CMD, the
business is on course to generate material free cash flow in
2025
We note that as an engineering consultant, Wood
benefits from the structural growth drivers of carbon emission
reductions and energy security. Revenues for 2024 are backstopped
by an order book of $6.3bn(1) and an increasing proportion
of Wood's revenues are linked to Carbon Emissions – at the last
report date, the percentage of work encompassing "green"
initiatives was 22% FY 2023 revenue, up from 20% just one year ago,
while the current pipeline is now 43% exposed to sustainable
solutions(1).
Relative Valuation & Performance
In spite of these many achievements, Wood's share price has
languished, and the company remains the lowliest valued company in
the sector. Wood trades at 1/3rd(6) of the multiple of
the comparable, higher quality peers like Worley (often cited as
your key competitor and the business most like Wood), Jacobs and
KBR and a 48%(6) discount to the sector average and with
only Tecnicas Reunidas trading cheaper, which given that according
to consensus numbers, it is ex-growth with close to half the
margins, this is would appear to be a low bar.
- Wood's share price has languished since the CMD
- Wood has delivered the lowest total return of its peers,
including its former OFS peers
- The discount in valuation against Wood's closest peer
globally, Worley, remains stubbornly wide
- Wood remains at an unwarranted discount to its listed peers,
including its former OFS peers
UK Mid-cap Curse
We accept and acknowledge that part of this
underperformance and lack of shareholder engagement in the equity
story is beyond your control. As can clearly be seen in the graphs
below, UK mid-caps have chronically underperformed global equities
in recent years. The first chart shows that the UK has materially
de-rated against world equities, with a forward PE multiple now
sitting at just 0.6x that of the MSCI World index, down from parity
in 2016. Equally, within the UK, the second chart and recent past
in particular (highlighted in red), shows that UK mid-caps have
underperformed UK large-caps in the time since Covid, unfortunately
coinciding with your strategic re-launch.
Whatever the reasons for this market-wide
underperformance, as a transformation story with history of poor
execution, you are a "show-me" story and, as such, will feel the
full effect of this apparent indifference from public markets. We
urge you to be realistic that these dynamics will not shift anytime
soon when assessing how best to serve shareholders in the near
term.
In Summary
You are delivering operationally, yet your shares
trade at the all-time lows. In the context of the Apollo bid
process, you described their approaches of 200p to 230p as
proposals which "significantly undervalued the repositioned Group's
prospects."(1). We don't doubt that, fundamentally, Wood
is worth significantly more than where it is currently trading in
the public markets and indeed more than those offers. However, if
there is no realistic prospect of achieving that value steady state
in the public markets, then this is a moot point.
When we look at the behaviour of your core
holders at the time of the previous approach, we note that
institutional holders sold millions of shares at an average price
of 214p(2) – their actions speaking louder perhaps than
any assurances of their belief in the fundamental value they may
have offered at the time. This trading pattern suggests that, at
the time of the offer, shareholders accepted, out of brutal
pragmatism, that realising 200p+ today, was a better course than
hoping for a multiple of that price, at some point in the
future.
You have given the UK public markets 17 months to
recognise the value creation possible in a 36 month turn-around
plan. The disconnect between intrinsic value and the value assigned
by the market has never been wider. We believe that it is time to
recognise that the next chapter of Wood's journey could be best
supported by different owners, and we urge you to undertake a
strategic review and explore the best way to maximise shareholder
value, including a sale of the company.
We have sent this letter to you first, but we
have also chosen to make this letter public so that the debate can
be open and transparent, and we encourage other shareholders to
make their views known to you.
We look forward to continuing our
discussions.
Best wishes,
Franck Tuil, CIO
Sparta Capital Management Ltd
About Sparta Capital
Sparta Capital is a multi-strategy investment
fund launched in 2021 investing globally in a broad range of public
and private securities, across both equity and credit markets. Our
investment process relies on intensively researching the
fundamentals of our targeted companies and identifying investment
opportunities where, for a variety of clearly identifiable reasons,
we believe a disconnect exists between the price of the securities
in question and their underlying value – in short, we look for
mispriced, catalyst-driven, investment opportunities.
Core to our investment process is the belief that
constructive engagement with the companies in which we invest is
not only our duty as responsible investors, but a highly effective
way to drive value creation for the mutual benefit of shareholders
and companies alike. We believe that the evolution of stock market
dynamics of the past several years, has created increasingly stark
disconnects between share price performance and investment
fundamentals and our philosophy is to work with the companies that
we invest in to address this.
Media Contacts
Greenbrook
Rob White / Michael Russell
spartacapital@greenbrookadvisory.com
+44 207 952 2000
Sparta Capital Management Limited ("Sparta") is authorised and
regulated by the Financial Conduct Authority of the United Kingdom (the "FCA"). This presentation
is made by Sparta to John Wood group
PLC (“Wood”) in Sparta’s capacity as an investor in Wood and not as
part of an advisory or other professional service to Wood or any
other person. Sparta is not advising the recipients of this
presentation and will not be held responsible for providing them
with the regulatory protections under the FCA rules. The
presentation is based on information which we consider to be
reliable but we make no representation or warranty, express or
implied, as to its accuracy, reliability or completeness. Sparta is
a Private Limited Company registered in England and Wales, Company No: 11178462. Registered
Office: 1 Knightsbridge Green, London SW1X 7QA.
This document is not an offer to, or solicitation of, any
potential clients or investors for the provision by Sparta of
investment management, advisory or any other comparable or related
services. No statement in this overview is or should be construed
as investment, legal, or tax advice, nor is any statement an offer
to sell, or a solicitation of an offer to buy, any security or
other instrument, or an offer to arrange any transaction, or to
enter into legal relations.
No representation is made as to the accuracy or completeness of
any information contained herein, and the recipient accepts all
risk in relying on this information for any purpose whatsoever.
Without prejudice to the foregoing, any views expressed herein are
the opinions of Sparta as of the date on which this document has
been prepared and are subject to change at any time without notice.
Sparta does not undertake to update this information. Any
forward-looking statements herein are inherently subject to
material business, economic and competitive risks and
uncertainties, many of which are beyond our control. In addition,
these forward-looking statements are subject to assumptions with
respect to future business strategies and decisions that are
subject to change.
[1] Source: Company financial reports. (*) Refers to constant FX
reported figures.
[2] Source: Sparta-compiled consensus based on Research Analysts
who have updated their model post FY 23 results. Based on company
defined OCF: Adj. EBITDA – cash adj. JV elements – Provisions –
Others – NWC.
[3] Source: Company CMD presentation: summation of expected
exceptional cash outflow FY 23 - 25
[4] Source: Company FY 23 Results Presentation ($120m including $50m simplification programme costs).
[5] Source: Company FY 23, FY 22 and H1 22 Results Presentation:
includes $145m settled in FY 23 and
$217m settled in H2 22 ($319m - $102m).
[6] Source: Based on Bloomberg EV/EBITDA NTM. Sector includes
Jacobs Solutions, KBR, Worley, Fluor Corp, Technip Energies, Maire
Tecnimont, Tecnicas Reunidas.
[1] Source: Bloomberg as of 5th April
2024.
2 Source: Bloomberg as of 5th April
2024. Assumes that any dividends are reinvested into the
security.
[1] Source: Bloomberg as of 5th April
2024.
[1] Source: Bloomberg as of 5th April
2024.
[1] Source: Company Press Release 22
February 2023.
[2] Source: Based on best efforts compilation of Form 8.3 data,
focusing only institutional investors and their shares sold. Daily
Bloomberg VWAP used as an approximation of price of shares
sold.
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