Stock Report | NRW Holdings

NRW Holdings (ASX:NWH) | BUY

//
Posted By
/
Comment0
/
Categories

By M3 Equity Research

Investment Summary

  • Golding acquisition to drive FY18 earnings and offers diversification and scale
  • Relationship with iron ore is misunderstood
  • New opportunities in gold and lithium offers upside risk

Ticker | ASX:NWH
GICS Sector | Industrials
Current Price | A$1.15
12m Target Price A$ 1.60
Upside | 39%
Market Cap | A$420m
P/E (TTM) | 12.7x
P/E (Forward) | 10.3x


BUSINESS DESCRIPTION

NRW Holdings Ltd. engages in the provision of civil contracting and mining services. It operates through the following segments: NRW Civil and Mining; Action Drill and Blast; and AES Equipment Solutions.

The NRW Civil and Mining segment specializes in the delivery of private and public civil infrastructure projects; mine development and contract mining; waste stripping and ore haulage supported by a fully mobile work force; and an extensive fleet of plant and equipment.

The Action Drill and Blast segment provides contract drill and blast services to mining and civil projects.

The AES Equipment Solutions segment offers maintenance services to the mining and resources sectors including the fabrication of water and service trucks.


INVESTMENT THESIS

  • Golding acquisition offers earnings, diversification and scale benefits

The recently completed Golding acquisition is expected to be very strongly EPS accretive (60%), with the business generating Revenue/EBITDA of $369m/$53m in FY17 (compared to NRW FY17 Revenue/EBITDA of $345m/$59m). The impact on FY18 is expected to be significant given that the combined order book has expanded by 56% from $0.9b to $1.4b, with half of that being committed for delivery in FY18. Besides these obvious earnings impacts (which are likely priced in), this acquisition also has strategic benefits by offering geographical diversification with Golding’s operations being entirely East-Coast based whereas NRW currently has zero presence in that region.

The acquisition also improves NRW’s sector diversification, given Golding’s strong infrastructure and urban presence especially in the booming East Coast market. NRW has previously had limited exposure to these segments.

NRW Graph
Moreover, scale remains a highly important value driver in the mining services sector given that larger companies can offer a full end-to-end service and thus more likely to secure contracts. With this acquisition, NRW can expand its service offering and thus expand its scale given that Golding provides full mine servicing capability.

  • Relationship with iron ore is misunderstood

Recent weakness/stagnation in NWH’s share price can be attributed to declines in the iron ore price, however the relationship between spot iron ore price and NWH is overstated given that the company’s exposure to this sector is via BHP, RIO and FMG. These are high-quality, Tier 1 clients who sit very low in the cost curve following years of efficiency improvements and cost management programs and are unlikely to exit their iron ore operations based on spot price volatility.

Management has also emphasised the importance of ‘sustaining iron ore projects’ which is encouraging, as this will ensure more stable cash flows compared to exploration and development projects.

NWH should continue to benefit from their strong relationships with these resource companies, especially as the mining capex cycle enters the early stages of an upswing driven by firming commodity prices, strengthening miner balance sheets and expanding capex budgets.

  • New opportunities in gold and lithium offers upside risk

NRW was recently awarded a significant contracts for servicing AJM’s (Altura Mining) new lithium mine, which offers exposure to the high growth lithium sector. This contract is of medium tenure (5 years). However, NRW does have a strong history of maintaining client relationships and the possibility of renewal is high.

Management has also noted ‘a growing number of prospects in iron ore and copper and gold’. Although not captured in the current order book and therefore not accounted in earnings estimates, stronger tendering activity offers an upside risk.


CATALYST

  • 1H18 Earnings

Given that FY17 results were strong (Revenue/EBITDA/NPAT up 29%/25%/33%, a full-period contribution of Golding will drive earnings in 1H18 alongside a cyclical recovery in business confidence and mining capex driving order book expansion. A recent restructuring of the balance sheet via a capital raising also provides flexibility for this growth (net debt/EBITDA of 0.35 down from 1.29 in FY16). Management also continues to see ‘a continued recovery in our core markets together with high levels of tendering activity’.

Consensus estimates include a Net Income and EBITDA Growth of 26% and 65% respectively. Nonetheless there is still strong potential for an earnings surprise, given that consensus estimates of Revenue currently imply a only a 1% rise in organic EBITDA (non-Golding) which we believe is a severe underestimation given the strengthening industry tailwinds and strong FY18 committed order book. NRW has also reported a $1.7b order book, with $750m of revenue secured in FY18 (compared to $370m revenue in FY17). There is also scope for sustained revenue growth given that management noted a $6b pipeline of opportunities, of which $1b are active tenders).

  • New contract announcements

Given the rising tender activity, there is a strong probability of NRW winning new contracts especially given its improved capabilities from the Golding acquisition. The market has also historically reacted positively to such announcements. For example, announcement of a negotiation regarding $111m worth of further construction at OZL’s Carrapateena Project was taken very positively, with the share price rising 8% on the day (24/8/17).


VALUATION & PEER COMPARISON

  • Relative Valuation

On a forward P/E basis, NRW trades at a significant discount to peers in the mining services industry. However, given that NRW has historically P/E range of 9-14x, there is significant room for a multiple rerate especially given NRW’s growth prospects. This rerate is likely to occur in the run up to earnings results, as was seen in the lead up to 1H17 results in February and in August. An increase in multiple of even 10% translates to a share price increase to $1.65 (using consensus FY18 EPS of $0.15), which represents 43% upside.

NRW Graph 2

NRW Table


KEY METRICS

Total Revenue ($) | 268.3m
Forward EPS Growth | 
29%
Dividend Yield (%) | 
0%
Beta | 
1.58
12 Month Momentum | 
98%
P/E (NTM) | 
10.27x
EV/EBITDA (NTM) | 
4.12x
ROE (%) | 
4.2%
EBITDA Margin (%) | 
14%
Nebt Debt/Equity (%) | 
5%


INVESTMENT RISK

  • Increasing Competition

The mining services has undergone significant consolidation over the last 6-12 months as companies increase their scale to capitalise on improving commodity prices and an anticipated upswing in the mining capex cycle. As a result, competitive rivalry levels in the industry have increased and given the contract-based nature of earnings, there is the risk that NRW will be outbid in new tenders. However, the recent Golding acquisition does offer greater scale and a stronger offering. It also allows NRW to expand its presence in new segments.

  • Acquisition Risk

Integration risk is also at issue here and a failure to realise synergies and/or leverage new capabilities would dampen EPS accretion. However, NRW has cited that it intends to maintain the Golding brand and allow current management to continue managing the business. This eliminates most of the integration risk. Furthermore NRW has a decent track record of successful integration of acquisitions, recently acquiring and integrating the East Coast operations of Hughes Drilling.


The content in this report has been prepared without taking into consideration any individual’s particular objectives, financial situation and needs, and is general in nature. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances. All information used in the publication of this report has been compiled from sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of M3 Investment Group at the time of publication. This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. Past performance is not a guarantee of future performance. To the maximum extent permitted by law, M3 Investment Group, its affiliates, the respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. Copyright 2017 M3 Investment Group Pty Limited. No part of this report or our website or its content may be reproduced, adapted, linked, distributed or transmitted in any form without the prior written consent of M3 Investment Group Pty Limited, other than to the extent necessary to view the material or as permitted by law. All rights reserved.