Why the lagging Worley (ASX:WOR) share price could be at COVID turning point

Everyone loves a good underdog story and the underperforming Worley Ltd (ASX: WOR) share price could prove to be a rewarding one to watch.

Everyone loves a good underdog story and the underperforming Worley Ltd (ASX: WOR) share price could prove to be a rewarding one to watch.

Shares in the engineering contractor have slumped 38% since the start of 2020 when the S&P/ASX 200 Index (Index:^AXJO) shed around 11%.

Worley isn't alone. Its peers have also been big laggards. The Downer EDI Limited (ASX: DOW) share price lost close to half its value while the Monadelphous Group Limited (ASX: MND) share price gave up a third of its market weight.

Downer and Worley share prices are post pandemic outperformers

But if history is any guide, at least two of these ASX stocks will outperform in the post COVID-19 world, according to Macquarie Group Ltd (ASX: MQG).

"The Contractors sector has underperformed ASX200 by 26ppt [percentage points] since the start of COVID 19 earlier in the year," said the broker.

"Interestingly, DOW and WOR both significantly outperformed post containment of SARS back in 2003."

Downer share price too heavily discounted

What could also help is how cheap the Downer share price is looking. The stock is trading on a FY21 price-earnings of 11.1 times, which is below the broader market and its own historical level.

Its reasonably bright outlook doesn't support the big discount either. Around 70% of its customers are government departments and its transformation into a lower-risk services business is progressing well.

Multiple catalysts in FY21

Further, there are a few FY21 catalysts that could trigger a re-rating in the stock. The group is looking to sell its mining and laundry services businesses, and any progress on that front will be welcomed by the market.

Downer is also well placed to grow earnings this financial year. We might start to see evidence of higher earnings and stronger cash conversion at the next reporting season.

Macquarie rates the stock as "outperform" with a 12-month price target of $5.29 a share.

Top pick in the sector

However, the broker's top pick for the sector is the Worley. The group posted a better than expected profit result last month but has little to show for the effort in terms of share price performance.

"WOR has acted quickly to manage costs and utilisation and has good leverage to expected medium term recovery in key end-markets," said Macquarie.

"Our latest summation of global oil & gas capex budgets for 2020 shows -24% on pcp and +6% in 2021.

"Hence we are moving through the worst of capex cuts this year with modest improvement expected in CY21."

The broker is recommending Worley as "outperform" with a price target of $13.46 a share.

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited and WorleyParsons Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. 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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