Company Overview: NRW Holdings Limited (ASX: NWH) is engaged in providing contract services to the resources and infrastructure sectors. It's civil and mining business units provide construction, bulk earth works, road & rail construction, along with contract mining and drill & blast services.  The Minerals, Energy & Technologies (MET) segment delivers turnkey design solutions, construction, and operations of minerals processing, to name a few. 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.

NWH Details

Uptick in Revenue Aided by Integration of Recent Acquisitions: The Group has acquired Primero Group Limited successfully during FY21, which further bolsters its MET business unit. The transaction is in line with the company’s objective to diversify its revenue streams and provide services across the whole lifecycle of projects from early planning, design, development, and construction to operations and maintenance.

FY21 Performance Highlights:

The company produced resilient results during the year, despite the impact of the COVID-19 pandemic and its repercussions on the availability of the labour pool.

• Total revenue including associates increased by 11.5% to ~$2,301 million in FY21, compared to ~$2,062 million in FY20. The results were augmented by the acquisition of BGC Contracting in FY20, and five months of contribution post the acquisition of Primero Group.
• The improvement in top-line also had a positive impact on the EBITDA, which reflected a growth of 6.7% to $266.7 million in FY21, compared to $250 million in FY20.
• The company reported net cash inflow from operating activities at $147.43 million in FY21, compared to an inflow of $215.70 million in the prior year, owing to increased working capital requirements.
• The management declared a fully franked final dividend of 5 cents per share for the period.

Revenue Trend (Source: Analysis by Kalkine Group)

Update on New Contacts:

On 28 October 2021, NWH has announced that its wholly-owned subsidiary Golding Contractors Pty Ltd has strengthened its portfolio with the addition of new work.

• Golding Contractors Pty Ltd has signed a Letter of Direction with Coronado Curragh Pty Ltd, which increases mining plant at the Curragh Main Mine with the introduction of a 7^th fleet for a 12-month period. The operations are expected to commence on 01 February 2022 and will be an addition to the mining operations already provided by Golding under the Mining Services Contract.
• It has also signed a contract with a member of the Fitzroy Australia Resources group of companies. This is in regard to re-establish open-cut mining in the Broadlea pit for a period of six months, commencing November 2021.
• The value of these combined projects is ~$60 million and is anticipated to employ 130 people.

Top 10 Shareholders: The top 10 shareholders together form around 33.07% 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 5.08%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported a gross margin of 57.5% in FY21, compared to an Industry Median of 14.8%. The liquidity of the company improved in FY21, with the current ratio at 1.39x compared to 1.13x in FY20. It ended FY21 with a cash position of $146.5 million as of 30 June 2021, and total debt of $317.8 million.

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

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

• Impact of COVID-19: The Group has been impacted by the COVID-19 pandemic, particularly on West Australian Pilbara-based projects, due to border closures and limited availability of labour pool.
• Commodity Price Risk: Its scale of operations is dependent on the mining activities of its clients, which are mainly driven by commodity prices. Any adverse impact on prices could, in turn, impact its business.
• Financial Risks: The company is also prone to financial risks, including credit risk, interest rate risk, and liquidity risks.

Outlook: NWH has maintained a decent order book at $3.4 billion as of FY21 end and is expected to expand further to $4.4 billion following the announcement of LOI for the extension of mining services at Curragh. The pipeline also remains decent at $14.5 billion across all the business units. The company expects the revenue in FY22 to be in the range of $2.4 - $2.5 billion, driven by expected growth in Resources, Infrastructure and Renewables.

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 52-weeks’ average levels of $1.360-$3.190. The stock of NWH gave a negative return of ~5.16% in the past six months and a negative return of ~2.16% in the past one week. 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 multiple, considering the challenge of availability of labour due to COVID-19, volatile price movements of commodities, and uncertain trading conditions in the near term. For the purpose of valuation, few peers like Perenti Global Ltd (ASX: PRN), Emeco Holdings Ltd (ASX: EHL), Macmahon Holdings Ltd (ASX: MAH) have been considered. Considering the expected upside in valuation & current trading levels, resilient performance in FY21, successful integration of recent acquisitions into the business and optimistic outlook backed by a decent pipeline of contracts, we recommend a ‘Buy’ rating on the stock at the current market price of $1.675, as on 08 November 2021, 03:13 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 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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