There are things to like in the statement – not least a further build in the order book to a new record of $20.5 billion – but a further £30 million loss on the troubled Laggan-Tomore project in Shetland (adding to the £130 million hit reported in April) is a reminder of the execution problems which have dogged the company. Also, guidance for a very strong second half weighting is always a worry and we think the rally could prove short-lived.
The order book is a useful barometer for all support services companies and Petrofac’s ability to win new work is impressive given a pretty unhelpful industry backdrop. However orders can be cancelled and unless work is carried out efficiently there is no guarantee it will deliver profit or cash flow. As the Laggan-Tomore example shows it can even result in losses.
The balance sheet is also under strain, with net debt rising to $1.2 billion, and although the second half bias to Petrofac’s 2015 results reflects the timing of major projects, companies in this situation often fail to deliver enough in the second half to make up for the shortfall in the first half leaving full year numbers short of expectations.
Berenberg retains the faith and reiterates a buy recommendation and £10.20 price target commenting that while ‘near-term risks to earnings remain, the record backlog points to robust earnings recovery over 2016-17’.