The big derating of the Worleyparsons Limited (ASX: WOR) share price stands in sharp contrast to the positive broker sentiment on the stock with UBS the latest to upgrade the engineering group to a "buy".
This means that nearly 80% of the nine brokers polled by Reuters think the stock's a bargain after the WOR share price plunged by more than 20% since October last year when it announced it was acquiring the Energy, Chemicals and Resources (ECR) division of US-based Jacobs Engineering Group.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 9% while the energy sector has fallen by less than 8%.
Don't just blame the oil price
The slump the crude oil price over the period didn't help Worley's cause (the company dropped Parsons from its name) although I don't think it explains all of the stock's underperformance given that the ECR acquisition means the group has a far more diversified customer base outside of the oil and gas sector.
Investors may also be sceptical about Worley's ability to properly swallow the US$3.3 billion ($4.6 billion) ECR acquisition, although the group's past track record would suggest we should give management the benefit of the doubt.
Worley's latest investor update is also reassuring with management increasing its forecast synergies by $20 million to $150 million over two years, highlighting the cross-selling opportunities for the merged group and relatively upbeat outlook for its sales pipeline.
Bargain buy with re-rating potential
The stock has fallen so much that UBS thinks now is the time to be buying the stock.
"We highlight that the stock is trading at a FY20 P/E multiple of 14x (UBSe) which represents a 25% discount to the ASX200 Industrials (ex. Fins). Our revised PT [price target] of A$16.00 implies a FY20 P/E of 17x which is a 10% discount to the market vs. a through cycle discount of [circa] 0%," said the broker.
"We forecast EBIT growth of 96%/13% in FY20/21 respectively underpinned by the acquisition of Jacobs ECR and our expectation for the staged capture of an identified A$150mn in acquisition synergies."
UBS isn't alone in its bullish call on the stock. Macquarie Group Ltd (ASX: MQG) has reiterated its "outperform" recommendation on the stock following the investor day presentation on Wednesday and is encouraged that the synergy upgrade comes only after five weeks of the takeover.
"We think there is re-rate potential given solid core business outlook and ECR [acquisition] off to a good start with upgraded cost target and with potentially more of same to come," said Macquarie.
"WOR is cheap trading on 11.9x FY20e PE (first full year of ECR) vs L/T 15x [average] PE. Share price is also trading significantly below eps correlation."
Macquarie has a $21.48 price target on Worley and this means the stock could deliver around a 66% gain over the next 12-months if dividends are included.
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