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Worley Parsons – Australia’s leading engineering business?

Worley Parsons – Australia’s leading engineering business?

On Your Money Your Call with Nina May on 24 September 2009 I promised to value Worley Parsons.

What is WOR worth? After running my ruler over the business’ historical fundamentals, I estimate WOR is currently valued at $27.44 (2010). The share price is $29.43, making it a little expensive at the moment.

But WOR is a business with attractive underlying long-term investment fundamentals, including an average return on equity of 23%, a modest net gearing level of 33% and bright prospects with ongoing demand for Australia’s resources.

This demand should underpin capital spending programs by our miners in the future and hence the need for engineering companies to continue servicing a market that has grown remarkably over the past 10 years.

WOR is one to add to your watchlist should a more rational share-price present itself.

By Roger Montgomery, 20 October 2009

Update 28 October, 2009

Please keep in mind that for WOR there is a very strong likelihood that the businesses future earnings will be materially impacted by the strong Australian dollar. 25% of Worley’s revenues come from Canada, 24% for the US and latin America, 15% from the Middle east / Asia and 11% from Europe and Africa.

Although many analysts and market commentators currently have concerns about the currency and the headwinds facing earnings, these have to be weighed up against the strong cash flows WOR is generating and the fact it is a leader in its sector globally. Also, a high oil price will be a positive. A high oil price makes previously uneconomical finds profitable and increases revenues for many firms which are already producing. More revenue equals bigger budgets for capital projects. Obviously. Saying this, consensus forecasts have fallen in recent days. This has led to a revision in my valuation to $26.08. This is by no means is a recommendation, merely a discussion about the strengths of the business and also its weaknesses in the face of a higher Australian dollar.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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4 Comments

  1. Roger I was wondering if you could value Crane ((CRG). I vallued it at $8.77 and it is curremntly $8.72 after a recent sharp decline in price.

    What do you value it at.

    • rogermontgomeryinsights
      :

      Just posted my thoughts to the blog Rodger – CRG was worth about $6.00 ten years ago and today its worth about $5.00. If the analysts are right with their earnings forecasts, my value of the business will not rise much more than 7.5% in 30 months time to just under $5.40.

  2. rogermontgomeryinsights
    :

    Hi Tim,
    Great to hear from you and thanks for your comment. I don’t use any third party tools at all anymore. I don’t have any use for it or them as I now use my own new and different formula. A few months back I received a similar query about my much higher valuation for CBA. My valauation was $55 at the time, which the shares recently surpassed.
    All the best,
    Roger

  3. Hi Roger.

    It puzzles me how your valuations are often significantly different from those of other valuation tools. I assume you would use the same valuation equation as explained in Brian McNiven’s book and yet you come up with a valuation for WOR almost 50% greater ($27.44 versus $18.49). The APC the other valuation tool uses in this case is 26% and RR is 13.5%. I assume equity figures and reinvested/distribution percentages are the same. Is this because you attribute a much lower RR or a much higher APC or a combination of both? I can come up with the $27.44 valuation if APC is closer to 30 and RR around 12. If you are using a very different valuation equation i would be interested to know.

    Regards,

    Tim Clare.

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