WorleyParsons worry

Engineering, procurement and construction management firm WorleyParsons Limited (ASX: WOR) has today reported a net profit of $155.1 million, for the six months to December 2012, a 2.1% increase over the previous year.

That’s despite a 33.7% increase in revenues to $4.4 billion, compared to $3.3 billion in the first half of the 2012 financial year. Most of that increase, however, was from a large jump in procurement services, on which the company makes no margin. Aggregated revenue, which excludes that revenue rose 14%. Disappointingly, WorleyParsons’ EBIT margin fell to 6.5%, from 7.3% previously, an issue that we have previously noted.

Despite the company’s statement that its gearing ratio was 20%, net debt to equity comes in at 25%, similar to last year.

Positive signs for the company are cash flows that almost doubled to $124.6 million, compared to the previous period and for shareholders, a fully franked interim dividend of 41.5 cents.

Looking to the outlook, Worley expects improved earnings from its hydrocarbons, power, and its minerals, metals and chemicals sectors for the full year, but flat earnings in the infrastructure and environment sector.

Key project award during the past six months have included work on Caltex Australia’s (ASX: CTX) Kurnell refinery, hydrology studies for Rio Tinto Limited (ASX: RIO), environmental services for Woodside Petroleum (ASX: WPL) as well as work on BHP Billiton’s (ASX: BHP) and Rio’s giant copper mine, Escondida in Chile.

Volatility in commodity prices has impacted the market for the company’s services, but Worley saw some improvement towards the end of the period, and expects growth in underlying earnings in the 2013 financial year.

Foolish takeaway

Trading on a forecast P/E ratio of around 20 times earnings, WorleyParsons isn’t cheap, especially when you consider that reported earnings are growing at 2% per year. Further falls in commodity or oil and gas prices could have a serious impact on the company’s earnings. Falling margins are also a concern, as was an announcement last year that the company could look at making a major acquisition for up to $1 billion.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Woodside and BHP.

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