Worley's strong financial performance and growth are tempered by margin challenges and risks, prompting a "Take Profit" recommendation at above $4.70 per share.

Worley, the global professional services company in the energy, chemicals, and resources sectors, has shown notable financial performance improvements recently. The company reported an increase in aggregated revenue to $5,610 million for H1 FY24, up from $4,599 million in H1 FY23. Similarly, underlying NPATA rose to $188 million, compared to $145 million for the same period last year. Statutory NPATA also showed significant improvement, reaching $139 million from a loss of $63 million, despite a $58 million write-off related to historical services in Ecuador. However, despite these positive financial results, some concerns warrant a cautious approach. The underlying EBITA increased by 28% to $345 million, driven by higher professional services revenue, project mix, and rate improvements. Yet, the underlying EBITA margin saw only a slight increase to 6.1% from 5.8%, reflecting a significant rise in procurement revenue. When excluding procurement, the margin was 7.5%, up from 6.6%, aligning with the company’s forecast. CEO Chris Ashton highlighted the consistent delivery and growth, with aggregated revenue up 22% across energy, chemicals, and resources segments. Sustainability-related work now represents 51% of total revenue, progressing towards the goal of 75% by FY26. Worley’s cash conversion ratio for H1 FY24 was 141.4% of underlying EBITA, with a normalized ratio of 95.7%. The company’s Days Sales Outstanding (DSO) decreased to 55.5 days from 63.6 days. Worley’s capital management remains strong, with leverage reduced to 1.8x from 2.4x, indicating prudent use of free cash flow to enhance liquidity and fund growth. The company is in the final year of a three-year, $100 million strategic investment program aimed at organic growth in sustainability markets, having spent $85 million so far and expecting to spend the remaining $15 million by H2 FY24. Despite positive growth indicators, Worley faces risks such as attracting and retaining skilled resources, inflation, supply chain disruptions, and geopolitical tensions. The company expects FY24 aggregated revenue to grow, with an underlying EBITA margin between 7.5-8%. Given the modest improvement in profit margins and Worley’s high earnings multiple, the stock might be considered overvalued at current levels. Therefore, we recommend securing profits on WOR, issuing a "Take Profit" recommendation at above $4.70 per share, reflecting a 67% upside from our initial "buy" recommendation at $8.80 per share.