WOR

Worley (big engineering firm) has been beset by issues in the Middle-East (project delays, disruptions associated with the war) and with a challenging environment in Chemicals. Also, high interest rates do tend to weigh on big projects (hard to get anything to “pencil in”, plus raw material inputs make it hard to price with confidence) all of which have impacted WOR.

Sales have been a bit weaker.

And the EMEA, as per our comments above, has been clearly very impacted.

Margins fell as a result. That said, looking back over time, perhaps margins are only a 5-5.5% sustainable rate, rather than 6% and change just due to these periodic gremlins that often adversely impact contractors. In other words, WOR often winds up down here, and maybe that’s the rate to bake into your “margin of safety” model.

It’s still pretty cash generative.

But debt has climbed of late, as a result of the drop in earnings.

The downgrades have been significant. The chart below shows net income over time, and the forecasts for the next 3 years. The line you see above the columns in the forecast section are the previous consensus estimates from 6 months ago. The drop has been large.

The backlog is pretty flat, even as there was a modest uplift compared to the prior year.

The valuation metrics are unsurprisingly lower, now. Let’s take that EBIT margin of 5%, which might be a more appropriate mid cycle point, and apply that to mid cycle multiples. 5% on EV/EBIT of 12x would suggest a 0.72 EV/Sales, much higher than it currently trades. The market is obviously sceptical of WORs ability to get there.

The earnings are expected to be heavily weighted to the 2H. That rarely ends well. So caution is warranted. Odds of disappointment are always higher with 2H skews.

One to watch.

DMP

Dominos sold off hard on yesterday’s update, even as it seems be bouncing back a touch today.

Same store sales trajectory does look bad, although we should note that they are a) trying to shrink to greatness (which SSS wouldn’t be affected by) and b) moving away from erratic discounting towards an every-day-low-price equivalent (which would affect SSS). That’s cost them a lot of customers, but, at least according to DMP mgmt, is leading to better economics.

NHF

The NIB (private health insurance provider) result was “fine”, but the key reasons for the sell off are a) that incurred claims (revenue to Ramsay Healthcare, for example) was quite a bit larger than the insurance revenue. In other words, margin transfer from the private health insurance providers back to the private hospitals. Given that Healthscope effectively went under, this is perhaps not overly surprising.

Policy holders (number) went up, which is good, but the growth rate has cooled from 3.2% a year ago, and the gross margin (as discussed) was under pressure. Lapse rates also increased, meaning the business has to work hard simply to stand still (the difference between the sales % and the lapse rate is the net policy holder growth rate). That net margin is at the low end of the guided range.

The private health insurance market remains reasonably healthy. You can see steady growth in the number of people insured, and you can see NHF maintaining their market share at roughly 9.7% below.

You can see the margin impact here, with ARHI at the lower end of the margin range. At least NZ recovered materially.

Cashflows remain strong.

SEK

Cashflows were quite a bit better for SEK. That had been one of our key gripes over recent years, the modest progress in growing OCF.

More to follow.