Worrying signs for WorleyParsons

Resources and energy services company’s margins fall

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It’s hard to be confident in a company that makes less than 5 cents on every dollar of revenue it earns. That sort of return might be ok for a high volume, capital light, stable business like Woolworths or Coles, but are a worry when it comes to a company servicing the cyclical resources and energy sectors.

WorleyParsons Limited’s (ASX: WOR) profit margins have fallen consistently over the past 5 years from 7% in 2008 to just 4.7% in 2012.

On revenues of more than $7.3 billion, the company made a profit of just $346m for the 2012 financial year. Earnings per share at 140.6 cents are less than they were five years ago, despite revenues growing by 51% over the same period. Worley has indicated that margins have fallen due to underperforming projects, which suggests the company isn’t focusing on  higher margin opportunities, or has accepted higher risk, lower margin projects. Either way, the risks of this business have gone up.

It’s no surprise then that shares are down 3.6% at 11.30am in trading today. Worley has commented that the results were negatively impacted by exchange rate movements, compared to the previous year, but their presentation shows that the impact in 2012 of $18m was less than 2011’s $32 million.

The company now employs more than 40,800 people globally across 41 countries, with 75% of them based outside Australia and more than 5,700 people joined during the last year. Worley have said that this shows the company’s expanding global presence, but to me it looks more like a potential future issue.

Like other professional services providers to the resources and energy sectors, including Transfield Services Limited (ASX: TSE), Downer EDI Limited (ASX: DOW) and United Group (ASX: UGL), Worley is at risk of individual projects underperforming, or like Leighton Holdings Limited (ASX: LEI), some of them ending up as costly mistakes. One of the keys to their financial performance is to minimise the downside risks associated with those projects, while being adequately compensated for the risk – in other words, earning a decent margin on the business.

CEO John Grill said that Worley is growing as a result of winning larger and more complex (read riskier) projects – and apparently with much lower margins. The company appears to have lit the fuse at both ends.

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Motley Fool writer/analyst Mike King owns shares in Leighton Holdings. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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