No bandwagon is so rickety that an activist investor won’t opportunistically hop on board. Here’s Franck Tuil, CIO of Sparta Capital Management, with a letter to Mark Kleinman Wood Group.
If the UK public markets are unwilling or unable to engage in Wood’s story, we believe you should undertake a strategic review and actively seek alternative solutions. We note, for example, the recent successful attempts by corporates to move their primary listing away from markets which they have determined do not recognise the true worth of their businesses. In particular, the US, where Wood’s peers Jacobs and KBR trade, and where you have significant operational and executive presence, would seem a logical potential listing venue.
UK market malaise stuff is very on-trend but here it reads tacked on, perhaps with the aim of putting some new headlines on an old problem. Tuil is calling again for Wood to “conduct a strategic review with an open mind as to the best way to achieve fair value for shareholders”, which is activist-speak for “find a buyer and dig me out of a hole”.
People familiar with things say Sparta started buying Wood shares in the summer of 2022, at 150p a share. In December of that year, Tuil wrote to the board because he was “concerned” that “significant undervaluation” made the company vulnerable to takeover.
In February 2023, Wood said it had rejected takeover approaches from Apollo . Sparta’s concern was such that shortly afterwards, its stake in Wood crossed the 3 per cent disclosure threshold. The maiden filing from the Knightsbridge-based activist also revealed it had built the position using CFDs.
In mid-April 2023, on the same day that Wood said it had given Apollo access to due diligence materials, Sparta top-sliced its stake from 3.45 per cent to 3.16 per cent. It then built the holding back up to 3.23 per cent, but hasn’t reported a trade since Apollo walked away in May.
Here’s a chart of all its RNS Form 8.3 filings showing net exposure and trades:
After Apollo walked, Sparta argued in another letter to Wood that it had been proven right and the board should launch a share buyback .
The board chose instead to save cash while stripping out costs. Wood is still fixing problems created by its 2017 acquisition of Amec Foster Wheeler, which in the last three years has cost $665mn in cash exceptionals and has pushed net debt towards 4 times ebitda.
After Wood reported a $105mn loss for 2023 and a year-end net debt of $693mn — and pushed its target for positive organic free cash flow back by a year to 2025 — Sparta has not repeated its call for buybacks. Today’s letter instead makes the argument that Wood is “the lowliest valued company in the sector”, so long as you choose to ignore the lowlier ones.
Wood trades at 1/3rd of the multiple of the comparable, higher quality peers like Worley (often cited as your key competitor and the business most like Wood), Jacobs and KBR and a 48% discount to the sector average and with only Tecnicas Reunidas trading cheaper, which given that according to consensus numbers, it is ex-growth with close to half the margins, this is would appear to be a low bar.
Why? Britain, probably. And since Worley, Technip and Maire have their primary listings in Australia, France and Italy, respectively, it has to be a British problem specifically, Sparta argues:
UK mid-caps have chronically underperformed global equities in recent years . . . Whatever the reasons for this market-wide underperformance, as a transformation story with history of poor execution, you are a ‘show-me’ story and, as such, will feel the full effect of this apparent indifference from public markets.
Alternatively, it’s not that at all. The comparisons Sparta makes are with the kind of businesses Wood aspires to become.
Engineering, procurement and construction companies tend to trade at about 5 times ebitda because there’s always a risk that a big lump-sum turnkey contract can turn bad. Worley, Jacobs and Fluor trade at about 10 times ebitda because they’ve shown they can win lots of small-scale projects, so are much lower risk. Wood has been working to adopt the same business model, but has yet to prove it can make any money from small-scale projects.
Disposals have gone some way to fixing Wood’s balance sheet so if it can start to make money there’s an argument that the stock is cheap, at 5 times the possible 2025 PE when the sector average is 7 times.
That’s the thing with show-me stories, though: they need the show. And they won’t be hurried up just because a noisy investor bought at all the wrong prices.