Company Overview: NRW Holdings Limited (ASX: NWH) provides contract services to the resources and infrastructure sectors. The company also has OEM capabilities that provide rebuild services for earthmoving equipment. It has a geographical presence in most of the states across Australia. The company was listed on ASX in September 2007.

NWH Details

NWH Rides on Significant Growth Pipeline & Acquisition Synergies: Despite the ongoing challenges and uncertainty led by COVID-19, the company’s portfolio exhibited robust operating metrics in FY21. The company continued to progress its market and growth strategy, as it successfully integrated three new businesses into the NRW Group, namely, BGC Contracting, DIAB Engineering and Primero Group. Primero Group was recently acquired in March 2021. These strategic acquisitions aided the company to enhance its capability and bolstered NWH’s Minerals, Energy & Technologies operating unit to pursue new business initiatives across a large pipeline of prospects.

Key Findings from FY21 Results:                                                     

• Total Revenues: In FY21, the company’s total revenues stood at $2.3 billion, in line with the guidance and up 11.5% year over year. The growth was aided by the acquisition of BGC Contracting and synergies from the Primero Group acquisition.
• Increase EBITDA: EBITDA for the period came in at $266.7 million, depicting a rise of 6.7% year over year. Operating EBIT stood at $120.6 million in FY21 and was lower than the year-ago period, due to cost increase from WA Pilbara project. Nevertheless, Operating EBIT came in line with consensus.
• Contract Awarded: The company won significant contract awards and extensions in FY21, which included an EPC contract for the Mt Holland Concentrator project for Covalent Lithium, under a joint venture between Wesfarmers and SQM. This contract demonstrates the company’s portfolio strength, thereby expanding its portfolio.
• Enhancing Shareholder’s Value: In FY21, the board declared a final dividend (fully franked) of 5 cents per share, bringing the total dividend to 9 cents per share. A strong dividend-paying history demonstrates NWH’s sustainable business model, a long track of profitability, rising cash flows, good liquidity, and a strong balance sheet.
• Segmental Highlight: The company has structured its business reporting into three segments, Civil, Mining, and Minerals, Energy & Technologies, and reported revenues of $726.5 million, $1,177.2 million, and $426.9 million, respectively. The addition of BGC Contracting’s mining activities, Primero activities, and growth in RCR Mining Technologies and DIAB Engineering, were key positives during the period.
• Liquidity Position: The company recorded $55 million cash at the end of FY21, with total debt amounting to ~$317.8 million. NWH generated $147.4 million net cash inflows from operating activities in FY21, owing to increased working capital requirements.

Acquisition Spree; Analysis by Kalkine Group

NRW Implements Mining Services Contract: On 22 December 2021, the company informed the market that it successfully implemented a five-year contract with Karara Mining Limited for mining services works at the Karara Iron Ore mine. The value of the project is circa $702 million and is anticipated to employ 250 people.

Key Metrics: The company reported a gross margin of 57.5% in FY21, compared to the industry median of 13.5%. The liquidity of the company improved in FY21, with the current ratio at 1.39x compared to 1.13x in FY20.

Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 33.49% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. and First Sentier Investors are holding a maximum stake in the company at 5.15% and 5.08%, respectively, as also highlighted in the chart below:

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: The company is exposed to the threats of the COVID-19 pandemic, as it could impact the operating environment and the company’s overall results. The company is exposed to stiff rivalry from competitors developing similar product lines and services. Further, foreign currency fluctuation risks, leveraged balance sheets and changes in government regulations might hinder the company’s business model. Also, the company is faced with the challenge of the availability of a limited resource pool, driven by increased activities in the construction and mining space.

Expect What?

The tender pipeline in the near term remains decent and has strengthened to $19.3 billion compared to $14.5 billion as of June 2021. The company has maintained a decent order book at $3.5 billion and is expected to expand to $4.5 million (including Curragh LOI) in FY22. For FY22, the company expects revenues to be between $2.4 - $2.5 billion, driven by expected growth in Resources, Infrastructure and Renewables. It also anticipates operating EBIT to be between $145 million and $155 million in FY22.

Valuation Methodology: P/E 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: The company’s stock went down by ~10.45% in the past nine months. Currently, the stock is trading below the average of its 52-week high and low levels of $3.19 and $1.36, respectively. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount as compared to its peers, considering the impact of the COVID-19 outbreak, delays in the deal closures, foreign currency fluctuation risks, changes in government regulations, etc. For the purpose of valuation, peers such as CIMIC Group Ltd (ASX: CIM), Perenti Global Ltd (ASX: PRN), Civmec Ltd (ASX: CVL), and others have been considered. Considering higher revenue base, acquisition synergies, contract wins, positive outlook, projects and pipeline development, indicative upside in valuation, and current trading level, we recommend a ‘Buy’ rating on the stock at the current market price of $1.79, as on 18 January 2022, 12:00 PM (GMT+10), Sydney, Eastern Australia.

NWH Daily Technical Chart, Data Source: REFINITIV 

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

Note 2: 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. 

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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