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Why shares in Worleyparsons Limited (ASX:WOR) have jumped to a 5-year high

The share price of Worleyparsons Limited (ASX: WOR) rallied to a five-year high today after it posted a full-year profit result that showed it was only at the start of its growth cycle.

The stock surged 3.8% to $18.88 ahead of the market close, bucking the 0.4% drop on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.

The stock is heading towards $20, in my opinion, after management posted 39.1% increase in underlying net profit to $171.4 million as aggregated revenue rose 8.5% to $4.8 billion for the year ended June 30, 2018.

The jump in top and bottom-lines aren’t the only reason to get excited about the oil & gas services company either.

Worleyparsons recorded a 229% uplift in operating cash flow to $259.7 million and underlying earnings before interest and tax (EBIT) and net profit margins have expanded to their highest level in five years.

This makes the company a standout. While the majority of companies’ profits have met or exceeded consensus expectations so far in this reporting season, not many have enjoyed better margins due to rising cost pressures.

Further, management said the integration of recently acquired UK Integrated Solutions is going better than expected with synergies running ahead of target.

Strong oil and gas prices have spurred energy companies to ramp up exploration and production activities and this bodes very well for Worleyparsons’ outlook with the backlog of work ballooning by 25.5% to $6.4 billion.

The jump in profit and cash has enabled the company to pay down debt by over $100 million in FY18 to bring its gearing down to a conservative 23%.

However, its infrastructure division posted an 11.6% drop in revenue due to a winding down of a large project in the Middle East. This division is also a relatively small part of the group (around 15% in revenue terms).

The only thing missing is a capital return on top of its 15 cents a share final dividend – its first since 2015. But this shows companies don’t need to throw a special dividend or hand back extra cash to shareholders to win support.

Worleyparsons isn’t the only engineering group that has performed strongly recently. NRW Holdings Limited (ASX: NWH), Seven Group Holdings Ltd Fully Paid Ord. Shrs (ASX: SVW) and Downer EDI Limited (ASX: DOW) are also worth keeping an eye on.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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