Company Overview: NRW Holdings Limited (ASX: NWH) provides contract services to the resources and infrastructure sectors in Australia. It has extensive operations in Western Australia, South Australia, New South Wales, Queensland and Victoria. The company caters to these regions mainly into four segments – Civil, Mining, Drill & Blast and Mining technologies.

NWH Details

Contract Wins Set to Drive the Long-Term Growth: The company has delivered a decent performance in FY20 and has been able to generate strong earnings growth and cash conversion during the period. The acquisition of BGC Contracting by the company enhances its abilities and projects it as a large construction partner in public work projects. The company has also been bolstered with recent key contract wins, which provides further revenue visibility going forward.

(a) Award of Letter of Intent: On 18 June 2021, the company has been awarded a letter of intent from Karara Mining Limited with regards to mining services works at the Karara Iron Ore mine.

• The anticipated value of the contract is ~$702 million over a project duration of five years. ~250 personnel are expected to be involved during the project tenure.
• The company anticipates an equipment capex of ~$170 million to be incurred over the term of the project.

(b) Award of Contract for RCR Mining Technologies: The company's wholly-owned subsidiary RCR Mining Technologies have been awarded a $27.2 million contract for the design and construction of a Primary Crushing Plant (PCP) at Fortescue Metals Group’s mine.

(c) Award of Contract for Primero: NWH’s subsidiary Primero Group Limited has been awarded a contract for the EPC segment of the Coburn Minerals Sands project for Strandline Resources. The contract has been valued at ~$135 million.

• The project is scheduled to be completed in Q4FY22 and will employ approximately 180 site personnel.
• The contract win demonstrates the company’s increasing pipeline of works through 2022 and 2023.

Brief on H1FY21 Financial Performance:

The company delivered a decent performance during H1FY21, reporting an increase in top-line and key order wins.

• Uptick in Revenue: It reported revenues of ~$1,168 million in H1FY21, reflecting an increase of ~44% to the previous corresponding period revenues of $808.7 million.
• Increase in EBITDA: EBITDA grew by ~28% to ~$132.8 million in H1FY21, compared to $103.8 million in the pcp.
• Key Wins: NWH posted order wins in excess of $1 billion in the first half of FY21, which includes two major infrastructure projects.
• Dividend Declaration: Declared interim dividend of 4 cents per share with ex-date of 22^nd March 2021, and payment date of 8^th April 2021.

Revenue Trend (Source: Analysis by Kalkine Group)

Agreement for the Sale of Mobile Plant:

As per a recent update, the company has announced that Boggabri Coal Operations Pty Ltd, has exercised an option to acquire the majority of the mining equipment of Golding Contractors Pty Ltd, a subsidiary of NWH.

• The equipment is expected to be sold for ~$81 million, of which ~$64 million will be used to pay down asset financing debt.
• The transaction, if fructifies will bring down the pro forma net debt from ~$115 million as of 30 June 2021 (comprising of cash balance of ~$145 million and total debt of ~$260 million), to ~$34 million.

Increase in Cash Balance (Source: Analysis by Kalkine Group)

Acquisition of Primero Group Limited: On 24 March 2021, NWH has updated that it has completed the compulsory acquisition of the remaining shares in Primero Group Limited, and now holds 100% of the shares on issue in Primero.

Top 10 Shareholders: The top 10 shareholders together form around 28.93% 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 5.07% and 4.59%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported a net margin of 2.6% in H1FY21 and ROE of 6.1%. The current ratio improved to 1.24x in H1FY21, from a level of 1.01x in H1FY20.

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

Key Risks: The company is exposed to the following company and sector-specific risks:

• Market Risk: The company's performance is influenced by the level of activity in the resources and mining industry. Mining production can be further influenced by factors such as prices of commodities, exchange rates, infrastructure spending, to name a few.
• Loss in Contracts: There is a risk that the contracts may not be renewed or cancelled, thus impacting the capability of the company to earn the expected revenue.
• Resource Availability: The onset of the COVID-19 pandemic has posed a challenge for the company and its margins got impacted due to lack of resources in the Pilbara projects.

Outlook: The company expects decent growth across several commodities going forward and maintains a strong pipeline of infrastructure projects in Western Australia. It further expects growth in infrastructure and defence opportunities in QLD and NSW. The business outlook seems decent in the Drill & Blast segment with a strong pipeline and several clients looking to scale their projects into higher commodity prices.

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: Primero Group has executed a Letter of Intent for an O&M contract with Panoramic Resources Limited for their Savannah Nickel Project. 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 ~7.95% in the past one year and a negative return of ~12.18% in the past three months. 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 can trade at a slight premium to its peer average P/E (NTM trading multiple), considering the impressive financial performance, robust order book and decrease in debt-to-equity ratio of the company. For this purpose, we have taken peers such as Perenti Global Ltd (ASX: PRN), Emeco Holdings Ltd (ASX: EHL), Macmahon Holdings Ltd (ASX: MAH), to name a few. Considering the expected upside in valuation and current trading levels, recent award of contracts, decent financial performance in H1FY21, completion of acquisition of Primero Group and a reduction in net debt, we recommend a ‘Buy’ rating on the stock at the current market price of $1.75, down by ~2.778% as on 19 July 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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