I would be exiting now, page-14

Hi madamswer,
I am becoming interested in investing some money in WOR, just wondering if you’ve considered the book value of WOR and how you come to it? Ive tried and come up with a book value of $8.30 per share which means the business is valued at less than market value currently. Also what is your thoughts on management here?


@biggerboat,

You should forget about using WOR's balance sheet as a valuation guide; WOR's balance sheet is made up of little other than air.

Intangible assets represent 110% of Shareholder Equity and of that, in turn, 92% of Intangible Assets is Goodwill from all the acquisitions that WOR has made over its near-15 years of listed life.

So, in terms of an asset play, compared to its market value of some $2.1bn, WOR's net current assets are worth a little over $400m, and in terms of tactile assets, WOR's Property, Plant and Equipment assets amount to $70m and Investment in Associates are valued at $80m-odd.

So that's around $550m of Net Tangible Assets (net of Current Liabilities), but when you include the $1.1bn of Non-Current Liabilities (including $970m of Long-Term Debt), then you end up with a business that has a seriously negative overall Net Tangible Assets.

WOR is what's known in colloquial investing circles as a "neck-up" sort of business (i.e., the Revenues and Profits are generated by the intellectual capital of the company's employees, i.e., from the neck-up.

And that's what WOR's balance sheet doesn't reflect: the value of its real assets, namely, its people. And because people are costed only in terms of Operating Expenditure, and not in Capital Expenditure terms, WOR is a very capital-light business (OCF covers Capex by almost 6 times, on average).

So, no; instead of WOR being an asset play the way it needs to be viewed is in terms of its Cash Flow generating capacity.

Because generating Cash Flow is something that WOR does a lot of.

Until this last half-yearly result, the company has never not generated Free Cash Flow in any single financial period (and even in the last half-year, it basically broke even at the Operating Cash Flow line, despite $77m out cash outflows for redundancies and restructuring, as well as over $200m being locked up duty to tardy customer payments.)

For context, since listing in 2003, WOR generated a total of $3.7bn in cumulative Operating Cash Flows. Out of that, it retained a mere $800m for capital spending purposes.

So that's almost $3.0bn in FCF over the past 13 years.
Compared to a company with a $2.1bn market value today.

Admittedly those were heady days, but even since the cycle started to decline in 2014, WOR has still generated $870m in Free Cash Flow (FY2015 = $497m, FY2015 = $164m and FY2016 = $210m).

And I'll wager any sum with anyone that by the time the full-year result is reported, it will show that for the full-year, both Operating Cash Flow and Free Cash Flow are both strongly positive, most likely in excess of $100m.

The problem with WOR is not that the company has a capital deficit; as can be seen, it generates obscene amounts of surplus capital. The problem for WOR has been that the capital has been allocated very badly by the company's management.

Of the $3.0bn of FCF the business has generated, an astonishing $2.3bn was blown on all manner of acquisitions between 2005 and 2015.

Again, for context, this amount exceeds the company's market value today.
Go figure.
Either that wild spending foray was very ill-considered and it destroyed a lot of value, or the company is being mis-priced by the market.
(My view: its probably a bit of both.)


"I also notice there has been been very little in the way of extra shares issued in the last 10 years, this drives me up the wall in other companies on the market at the moment."

Yes, I think that there are few corporate crimes as heinous as not respecting the share capital base of a company, and issuing new shares willy-nilly.

And for all of management's many faults (I think you can tell I've little respect for the board and the company''s senior executives), at least they haven't compounded the mistake of frittering away shareholder funds by then diluting those same poor shareholder by the issuance of new stock.

The one and only capital raising was undertaken in 2007, $480m for the $1.1bn acquisition of the Colt Group, providing WOR access to Canada's oil sands business, which was growing rapidly in the slipstream of an oil price that was on a tear towards $120/bbl. (I wonder how that investment panned out for WOR? Not too good at all, I'd imagine!)

But since then, Shares on Issue has remained quite constant (242m @ 2008, compared to $248m today).

And this, I think, says more about the naturally strong cash flows of the business than it does about any disciplined insights on the part of management. Put another way, the reason they haven't ever needed to raise new equity capital is because the balance sheet is rapidly self-repairing due to the strong Cash Flows the business generates, and the minimal calls on capital.

(Hence the reason the CEO and CFO are able to categorically rule out any need for a capital raising, despite the company's solvency metrics being in their worst shape ever, viz 3.0 times Net Debt-to-Annualised EBITDA, and EBITDA-to-Net Interest Coverage of 5.1 times)

On that note, I suspect people are going to be most surprised at just how strong the Cash Flows are going to be in the current half and how different the year-end Net Debt position will look.

But to answer your question of my opinion on management: I am buying shares in WOR not because of them, but despite them.

Nuff sed.