NRW Holdings Limited

Company Overview: NRW Holdings Limited (ASX: NWH) is engaged in the provision of contract services to the resources and infrastructure sectors in Australia. Its scope of work includes contract mining, drill and blast, and bulk earthworks and concrete installation. It had a workforce of around 7,000 people and more than one hundred projects as of FY20, with extensive operations in Western Australia, South Australia, New South Wales and Queensland.

NWH Details

Order Wins and Strategic Agreements Aiding in Top-Line Growth: NRW Holdings Limited (ASX: NWH) provides mining, contracting, installation services, etc. to the resources and infrastructure sectors. The market capitalisation of the company as on 12 April 2021, stood at ~$953.81 million. As per a recent update, the company has announced that its wholly-owned subsidiary Primero Group, has executed an LOI for an O&M contract with Panoramic Resources Limited. Under the agreement, Primero is supposed to operate and maintain the processing and infrastructure facilities at the Savannah Nickel mine for a term of three years, with an option to extend it to an additional two years.

NWH has been able to deliver sustained growth over the past few years owing to growth in its core markets and the successful acquisition and integration of Golding, RCRMT and BGC Contracting.

During H1FY21, the company delivered resilient financial results with revenue growth of ~44% to ~$1,168 million, when compared to the prior corresponding period. The revenue growth was aided by order wins in civil and the addition of BGC Contracting. EBITDA grew by ~28% to $132.8 million during the same period. NWH ended the period with a comfortable cash position of $171.4 million as of 31 December 2020, along with an improvement in the net debt position to $96.5 million. It declared an interim dividend of 4 cents per share in H1FY21. There has been a slight increase in the working capital during the period, mostly due to repayment of contract advances.

H1FY21 Financial Performance (Source: Company Reports)

Earnings Driven by Decent Performance in the Civil and Mining Segments: The company had witnessed an impressive growth of ~52% in revenue to $464.9 million in the Civil segment, aided by the award of contracts in H1FY21. EBITDA stood at $15.8 million during the same period, with a slight impact of the COVID-19 pandemic on its margins. The segment pipeline looks decent through the next five years, with the award of major sustaining projects in iron ore. In the mining business segment, revenue grew by ~46% to $547.8 million during H1FY21, in comparison to the pcp. It was awarded ~$123 million contract for Roper Bar Iron Ore Project for Nathan River Resources in NT. The company has witnessed a substantial increase in tender opportunities in several hard rock commodities during the start of the 2021 period, which augurs well for the segment. The revenue growth in the Drill & Blast segment was driven by the contribution of projects won in the prior period.

H1FY21 Revenue Performance Across Segments (Source: Company Reports)

Completion of Acquisition of Primero Group Limited: NWH has announced that it has completed the compulsory acquisition of Primero Group Limited on 24 March 2021. Primero is a vertically integrated engineering group that expertise in the design, construction and operation of resource projects, and its business model complements well with that of NWH. Post the acquisition, the company holds 100% of the shares on issue in Primero. The acquisition provides the company with full construction and EPC delivery capability. It further provides an opportunity to expands its Minerals, Energy & Technologies (MET) capabilities, which will provide leverage for the combined business entity to pursue new growth opportunities. RCR Mining Technologies and Primero have successfully delivered HOP9 crushing plant for Fortescue Metals Group in the recent past. It is also well-positioned to develop energy solutions for the future, including lithium and hydrogen technologies, as well as other renewables.

Top 10 Shareholders: The top 10 shareholders together form around 28.79% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc.  and Vinva Investment Management Limited are holding a maximum stake in the company at 4.98% and 4.60%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company reported a gross profit of 58.3% in H1FY21 in comparison to the industry median of 13.6%. Net margin stood at 2.6% during the same period. It reported an increase in asset turnover to 0.94x in H1FY21 from 0.88x in H1FY20. NWH delivered an ROE of 6.1% during the period. There was also an uptick in the current ratio of the company to 1.24x in H1FY21 from 1.01x in H1FY20. Debt-to-equity ratio reduced to 0.55x from a level of 0.96x during the same period under consideration.

Growth and Liquidity Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The company operates in a sector where it is subject to various environmental regulations and has to comply with the authorities in regards to any concerns or environmental breaches. Its profitability is also dependent on the level of activity in the resources and mining industry, which is impacted by a number of external factors outside the scope of NWH. It also operates in a highly competitive market where business sustainability and contract wins depend on several factors, including clients' criteria to evaluate potential service providers. There is a business risk that NRW's contracts may be cancelled or might not be renewed considering the impact of macro events like the ongoing COVID pandemic. Moreover, the execution of the company’s projects depends on the availability of resources, and any delay might have an impact on the company's ability for timely delivery of the project.

Outlook: The company is optimistic in its business prospects with order intake of $1 billion during the first half of FY21. It has retained its FY21 revenue estimates to be between $2.2 billion to $2.3 billion, compared to a revenue of ~$2 billion in FY20. It has reported an increase in its tender pipeline to $14.1 billion, which includes submitted tenders of ~$5 billion. NWH expects demand for commodities to remain strong going forward and anticipates growth aided by the increased expenditure on infrastructure projects at the state and federal level.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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: The company's wholly-owned subsidiary Golding Contractors Pty Ltd has received a 12-month extension to its existing agreement with Wonbindi Coal Pty Ltd. The extension provides comfort of ~$120 million to the existing contract and now extends to June 2022.  As per ASX, the stock of NWH is trading below its average 52-weeks’ levels of $1.440-$3.190. The stock of NWH gave a positive return of ~21.21% in the past nine months and a positive return of ~18.34% in the past one year. On a technical analysis front, the stock of NWH has a support level of ~$1.919 and a resistance level of ~$2.235. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight premium to its peer median P/E (NTM trading multiple), considering the decent top-line performance and expected growth in earnings from synergy benefits with Primero. For the purpose, have taken peers such as Emeco Holdings Limited (ASX: EHL), Service Stream Ltd (ASX: SSM), to name a few. Considering the expected upside in valuation, current trading levels, decent top-line performance in the mining and civil business segments, strong order book and optimistic long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $2.00, down by 4.307% as on April 12, 2021.

NWH Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

Disclaimer

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