Weir Group’s Shares Jump 25% on Announcement to Sell Oil & Gas Division to Caterpillar

Weir Group Plc, a Scottish engineering company, said that it has entered into an agreement for the all-cash sale of its entire oil & gas division to Caterpillar Inc. for an Enterprise Value of $405 million, sending its shares up 25% on Monday.

The deal, which follows a collapse in global oil prices and a swathe of bankruptcies in the sector, will have a $70 million U.S. cash tax benefit for Weir, the company said.

In July, Illinois-based Caterpillar, considered a bellwether for economic activity, warned of continued sluggishness in equipment sales due to the coronavirus pandemic, with its main customers in highly cyclical businesses such as mining and construction, Reuters reported.

Weir Group’s shares jumped 25% to GBX 1,600 on Monday; however, the stock is also down 2% so far this year.

“Share price reaction looks fair. The Oil & Gas business has been a large drag on Weir’s valuation given its far more cyclical revenues and earnings, and in recent years, much lower margin. Stripping out Oil & Gas, we now value Weir on 2.4x EV/Sales, which is the bottom of the range of Tier 2 industrials,” said Ryan Gregory, equity analyst at Liberum.

“This reflects Weir’s lower rate of earnings growth in its mining businesses; Minerals has delivered an earnings CAGR of just 4% over the past five and ten years (up to 2019) compared to as much as 8% for Epiroc (which we expect to accelerate further). 2.4x EV/Sales (Minerals + ESCO) along with the Oil & Gas proceeds generates our new target price of 1575p (770p). With a 5% upside to the current share price, we remain on Hold.”

Executive comment

“We are pleased to have reached this agreement that delivers a great home for the Oil & Gas division and maximises value for our stakeholders. Alongside the previous sale of the Flow Control division and the acquisition of ESCO, it is a major milestone in transforming the Group into a focused, premium mining technology business,” Jon Stanton, Weir Group Chief Executive Officer said.

“It means Weir is ideally positioned to benefit from long-term structural-demographic trends and climate change actions which will increase demand for essential metals that must also be produced more sustainably and efficiently.  This will require innovative engineering and close customer partnerships that define Weir, and it is why we are so excited about the future.”

Weir Group stock forecast

Ten analysts forecast the average price in 12 months at 1,367.14p with a high forecast of 1,680p and a low forecast of 1,200p. The average price target represents a -7.22% decrease from the last price of 1,473.50p. From those ten, four analysts rated ‘Buy’, six analysts rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

Royal Bank of Canada raised their price target on shares of Weir Group to GBX 1,680 from GBX 1,420 and gave the stock an “outperform” rating. Morgan Stanley upped their price objective to GBX 1,210 from GBX 1,150 and gave the company an “equal weight” rating.

Several other analysts also recently issued reports on the company. Credit Suisse Group raised their target price to GBX 1,380 from GBX 1,150 and gave the stock a “neutral” rating. Liberum raised their target price to 1575p from 770p and Credit Suisse upped their stock price forecast to 1,600p from 1,380p.

Analyst comment

“Earlier this year, mgmt flagged its desire to sell the division and focus on being a “premium mining technology pure play”. This is a good outcome, we believe, across the board. It gets rid of a ‘problem child’, debt is reduced, this is a better price than we expected, and the remaining business is a very strong one,” said Andy Douglas, equity analyst at Morgan Stanley.

“The Minerals and ESCO divisions are quality businesses, and although they should not be held in the same esteem as the likes of Halma and Spirax Sarco, both divisions have proven to be impressive and resilient. We would therefore expect the ‘new’ Weir to trade at a premium to the wider UK Industrials sector. We also note that its closest peer, Epiroc (EPIA SS, NC), trades at c19x FY21F EV/EBITA (and c27x PER, although it enjoys a net cash position) based on Bloomberg consensus forecasts,” he added.