Should you buy the dip on Worley after major shareholder dumps stake?

Worley has been a poster child for the energy transition, as it straddles servicing the old-hat energy producers as well as the new green energy cohort.

In August last year, I interviewed CFO Tiernan O’Rourke who was keen to point out that Worley was well on its way to achieving its 2026 target of sourcing 75% of its revenues from sustainability-related projects. The company had already achieved a 41% contribution from such projects in FY23.

The Worley share price had dumped as much as 11% today

Despite the progress and upside potential, the Worley share price had dumped as much as 11% today. So, what has happened?

Bailing out

The reason for today’s big drop is Worley’s largest shareholder, Dar Group – a Dubai-based infrastructure group – has decided to dump 19% of its holding in Worley. This will see Dar’s ownership fall from 23.5%, to 4.5%.

The news broke yesterday afternoon, after market close, with a block trade used to offload the $1.4 billion stake.

According to the AFR, brokers were asking fund managers to bid in 5¢ increments from a $14.25-a-share floor price, towards a maximum of $15 a share – representing an 8-12.6% discount to Worley’s last close.

Unrequited love

A block trade, worth north of $1 billion no less, is an aggressive and abrupt way to exit a position.

So, why is Dar Group selling? The company has been on Worley’s register for more than seven years, having had a tilt at taking it over in 2016.

Since then, in 2019, Worley has positioned its Australian ownership to be in the “national interest” and is believed to have written a submission to the Foreign Investment Review Board (FIRB) titled “Worley and the National Interest”.

As reported by the AFR at the time, “the 36-page document says Worley was a globally significant Australian company with capabilities and networks that were highly valuable in the resolution of strategic challenges facing Australia and the world”.

These moves from Worley were seen as firm pushback against Dar Group seeking to obtain governance control initially, and then ownership of the company.

Whilst Dar Group had retained its FIRB-approved stake and the board seat it won in 2020 up until yesterday, it seems it has finally conceded it won’t be able to gain control of Worley, and therefore, it’s given up the pursuit.

Buy the dip opportunity?

The question now begs whether the sell down by Dar Group, and the subsequent share price retreat, represents as a buying opportunity.

Whilst Dar and Worley have worked on several projects together, it does not appear that Dar is directly responsible for large amount of Worley’s revenue (although this is impossible to determine from company announcements).

If Dar’s selling of its stake results in no material impact on revenue and profits, then today’s drop may potentially be considered a buying opportunity.

Broker Recommendations

For what it’s worth, Citi published a note on 10 April with a BUY rating and $20 price target, saying the following:

‘We have overhauled our Worley model to better forecast seasonality, procurement, and cash conversion. We see >5% upside to FY24 consensus EBITA forecasts from revenue seasonality alone, before considering growth. Oddly, VA consensus assumes 0% top line growth (ex-procurement) in FY24 despite the company guiding for “growth”. We are 5% ahead on NPATA based on revenue. Similarly, for FY25 we are ahead on top line courtesy of being willing to include CP2 LNG in our numbers which is awaiting FERC approval, and in line for EBITA margins, driving our NPATA forecasts 8% higher in FY25. Target Price trimmed 3% to $20.’

An older note from UBS, published on 29 February, also had a BUY rating and $22 price target, noting the following:

‘Worley delivered 1H24 EBITA growth of +28% vs. pcp (proforma) to A$345mn, broadly consistent with market expectations. Earnings growth was underpinned by ongoing margin expansion, with the 1H24 EBITA margin (ex procurement) of 7.5% delivered above both 1H/2H23 (6.6%/7.3% PF basis). Margin expansion was attributed to both rate improvements given elevated engineering demand, and favourable mix, with Worley undertaking a higher proportion of professional services work. The company continues to demonstrate momentum in key lead indicators that support near-term EPS growth, with backlog +11% vs. pcp; book-to-bill 1.1x; and headcount +2%.’