Foster Wheeler AG

FWLT : NASDAQ : US$28.86
BUY 
Target $37.50

Corporation Description

Based in Zug, Switzerland, Foster Wheeler AG is a global engineering and construction contractor and power equipment supplier delivering technically advanced, reliable facilities and equipment. The company employs approximately 13,500 professionals with specialized expertise dedicated to serving clients. Its two primary business groups consist of the Global Engineering & Construction Group and the Global Power Group.
All amounts in US$ unless otherwise noted.

IMPROVED OUTLOOK & SURGING E&C BACKLOG: TARGET TO US$37.50 FROM US$30.00, REITERATE BUY RATING


Investment recommendation
We reiterate our BUY rating and increase our one-year target price 25% to US$37.50 following strong Q3/13 results and an increased EPS forecast. Global E&C backlog is 71% higher y/y (and 61% above last cycle’s peak) and we found management’s view of booking opportunities incrementally more positive. We see robust EPS growth through 2015, notwithstanding our downgraded E&C margin expectations to reflect mix. We have increased our 2015 EPS estimate to $2.45 from $2.15 and our target multiple to 14x from 13x, brining our target price to US$37.50 when adding $3.50/share in freehold cash forecast at year-end 2014.
Investment highlights
Excluding a $0.05 FX gain, FW reported Q3/13 EPS of $0.47, ahead of our $0.40 estimate and the Street at $0.43. Scope revenue was 7% below forecast, but GPG EBITDA margin offset this coming in at 25% compared to our 17% estimate on solid profit enhancement realization. GPG 2013 margin guidance was unchanged at 17-19% while E&C was increased to 11-13% from 10-12%.
Management believes activity is picking up in E&C. This is especially true in N. America (abundant small/medium sized awards and EPC opportunities in the US plus SAGD in Canada) and the Middle East (Iraq and Saudi Arabia where a $70 billion petchem spend is on tap).
Valuation
FW trades at 15.2x our 2014E EPS vs. the group at 14.5x.

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