NRW Holdings Limited

Company Overview: NRW Holdings Limited (ASX: NWH) provides contract services to the resources and infrastructure sectors. Its civil and mining business unit provides civil construction services, including bulk earthworks, road & rail construction, concrete installation, along with contract mining and drill & blast services. The company also has expertise in OEM capabilities and provides refurbishment & rebuild services s for earthmoving equipment and machinery. It has been rendering support to over a hundred projects across Australia.

NWH Details

Revenue to be Driven by Decent Order Book and Contract Wins: During FY21, the Group was impacted by the onset of the COVID-19 pandemic on its operations, particularly on West Australian Pilbara based projects. However, Golding Mining and the RCR Mining Technologies and DIAB Engineering business vertical delivered decent performance during the FY21 period driven by long-term contracts and a stable workforce.

Award of Major Contract to Primero Group:

The company has recently announced that its wholly-owned subsidiary Primero Group has been awarded a material contract for the EPC of the Mt Holland Concentrator project for Covalent Lithium.

• Primero Group is expected to process ore at a rate of ~2mtpa and produce an output of ~400,000 tpa of spodumene concentrate in order to feed the Lithium Hydroxide conversion refinery situated at Kwinana.
• The award of the contract is the culmination of discussions for the past 18 months and is being valued at ~$290 million.

FY21 Performance Overview:

During the year, the company reported an uplift in revenues despite the impact of the COVID-19 pandemic on its operations.

• Revenue (inclusive of share from associates & JVs) grew by 11.5% to ~$2.3 billion in FY21, which was in line with guidance.
• EBITDA improved by 6.7% to $266.7 million during the year when compared to FY20. However, operating EBIT decreased to $120.6 million in FY21 compared to $140.9 million in FY20, owing to an increase in WA Pilbara project’s cost.
• Net earnings (NPATN) during the period stood at $75.1 million, compared to $89.7 million in the prior corresponding year.
• The cash flow from operations was at $147.4 million, reflecting an increase in working capital due to pending resolution of outstanding claims and variations.
• There has been an improvement in the net debt position with pro forma net debt at $88.7 million as of 30 June 2021, compared to $139.7 million as of 30 June 2020.

Revenue Trend (Source: Analysis by Kalkine Group)

Extension to Phosphate Hill Mining Contract:

On 6 September 2021, the company has updated that its wholly-owned subsidiary Golding Contractors Pty Ltd has signed a 5-year contract extension with Southern Cross Fertilisers. This translates to Golding's mining contract at Phosphate Hill will extend to 6 September 2026, and the contract extension value has been anticipated to be between $110 million and $120 million over the term.

Dividend Payment:

NWH has declared a final dividend of 5 cents per share in FY21, in line with the revised dividend policy advised at H1FY21. The dividend will be fully franked with an ex-date of 23 September 2021 and a payment date of 13 October 2021.

Top 10 Shareholders: The top 10 shareholders together form around 33.01% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc.  and Colonial First State Investments Limited   are holding a maximum stake in the company at 5.15% and 5%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The Group reported a gross margin of 57.5% and a net margin of 2.4% in FY21. ROE of the company stood at 10.7% during the period. The current ratio of the company improved to 1.39x in FY21, compared to 1.13x in FY20. It ended the period with a cash position of $146.5 million as of 30 June 2021, compared to $170.2 million as of 30 June 2020 period.

Liquidity Profile and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Sector Risk: Its line of business is prone to the risk of volatility in the sector demand and the level of activity in the resources and mining industry.
• Macro Risk: The contract operations are also subject to macro risks like heavy rainfall, geological instability, and the outbreak of some pandemic like the ongoing COVID-19.
• Financial Risk: The company is also exposed to credit risk, interest rate risk and liquidity risk.

Outlook: NWH has reported a decent order book of $3.4 billion as of 30 June 2021, compared to $3 billion during the previous corresponding period end. There has been simultaneous growth in the tender pipeline to $14.5 billion for the next 12 months. The Group has projected the FY22 revenue to be between $2.4 billion and $2.5 billion. The company anticipates the Operating EBIT to be between $145 million and $155 million in FY22.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per ASX, the stock of NWH is trading below its average 52-weeks’ levels of $1.360-$3.190. The stock of NWH gave a positive return of ~19.35% in the past three months and a negative return of ~22.55% in the past one year. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average, considering the impact of the COVID-19 pandemic on its operations due to issues in staff retention and recruitment, decline in operating EBIT and a decrease in ROE performance. For the purpose of valuation, few peers like Monadelphous Group Ltd (ASX: MND), CIMIC Group Ltd (ASX: CIM), Lycopodium Ltd (ASX: LYL) have been considered. Considering the expected upside in valuation & current trading levels, increase in top-line despite the impact of COVID-19 pandemic, improvement in EBITDA, decent long-term outlook, award of major contract received by the Primero Group and an extension to Phosphate Hill Mining contract, we recommend a ‘Buy’ rating on the stock at the current market price of $1.66, down by 9.290% as on 20 September 2021.

NWH Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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