NRW Holdings Limited

NWH Details

NRW Holdings Limited (ASX: NWH) is a leading provider of diversified contract services to the resources and infrastructure sectors in Australia. With extensive operations in all Australian States except Tasmania and an office in Canada, NRW’s geographical diversification is complemented by its ability to deliver a wide range of services such as bulk earthworks, road and rail construction and concrete installation, together with contract mining and drill and blast services through NRW Civil & Mining, Golding Contractors and Action Drill & Blast. The company has a market capitalization of ~$757.57 million as on 26^th May 2021.

Results Performance (Half-Year ended 31 December 2020)

The company’s revenue for the first six months stood at $1,168 million, an increase of 44% on previous corresponding period (pcp). Margins on Pilbara projects impacted by resource availability due to continued resource constraints related to COVID-19 measures. EBITDA for the period stood at $132.8 million, an increase of 28% on pcp. Cash balance at the end of the period stood at $171.4 million, with reduction in net debt by $43.2 million to $96.5 million. The Board of Directors declared an interim dividend of 4 cents per share.

Key Data (Source: Company Reports)

Outlook:

Due to both sustained growth in NWH’s core markets and the successful acquisitions of Golding, RCRMT and BGC Contracting, the company delivered significant growth over the last four years. With the increasing expenditure on Infrastructure projects at state and federal level, demand for commodities remaining strong and as a consequence of the recently announced Primero acquisition, the growth can be expected to remain strong in the coming period. Revenue forecast for FY21 is between $2.2 billion to $2.3 billion.

Key Risks:

The company is exposed to the risks related to the COVID-19. In H1 FY 2021, the margins on the Pilbara projects were impacted by the resource availability because of constraints associated with COVID-19 measures.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The previous week was a confirmation to a bullish reversal as it had given a stronger closing with around 75% of the body of the bearish candle of a week prior. Although, the ongoing week has given a flattish close at $1.69, it is still towards continuation of uptrend. The technical indicator RSI with a reading around 34 and a curve at the end pointing flat to up, suggests gaining of momentum for the stock.

Going forward, the stock may have resistance around the 38.2% retracement level of $2.13 whereas support could be around $1.47.

Stock Recommendation:

The company’s gross margin and EBITDA margin for H1FY21 stood at 58.3% and 10.2%, better than the industry median of 13.1% and 6.7%, respectively implying decent fundamentals. ROE for H1FY21 stood at 6.1%, better than the industry median of 5.1%, implying that the company generated better return for the shareholders than the peer group. Its current ratio for H1FY21 stood at 1.24x, better than the industry median of 1.10x, implying decent liquidity position of the company than the peer group.

The stock declined by ~22.8% in 9 months. It has made a 52-week low and high of $1.490 and $3.190, respectively. It is trading towards 52-week lower levels.

We have valued the stock using Price/Earnings Per Share multiple-based illustrative relative valuation and have arrived at a target price that reflects a rise of low double-digit (in % terms). We have assigned a slight premium to Price/Earnings Per Share Multiple (NTM) (Peer Average) considering decent liquidity position which could help the company in navigating tough conditions.

Considering the aforesaid facts, we give a “Buy” recommendation on the stock at the current market price of $1.675 per share, up by 0.903% on 26^th May 2021.

Service Stream Limited

SSM Details

Service Stream Limited (ASX: SSM) is a provider of essential network services to the telecommunications and utility sectors. The company is operating across all estates and territories. The company has a market capitalization of ~$350.88 million as on 26^th May 2021.

Results Performance (Half-Year ended 31 December 2020)

The company’s revenue for the first six months stood at $409.902 million, a decline of 17.7% on previous corresponding period (pcp), reflecting lower contribution from the Group’s telecommunications segment, driven by the conclusion of nbn construction operations last year and a step down in activation volumes. Earnings before interest expense, taxation, depreciation and amortisation (EBITDA) for the period stood at $39.126 million, a decline of 30.7% on pcp. Profit from ordinary activities after tax attributable to members for the period stood at $16.241 million, a decline of 40.5% on pcp. The Board of Directors declared an interim dividend of 2.5 cps (fully-franked), maintaining Group payout ratio of ~60%.

Key Data (Source: Company Reports)

Outlook:

Due to increased proactive maintenance programs previously delayed by clients and the delivery of new work programs recently secured, the Group expected higher contribution during the second half of FY21. Current trading conditions as well as COVID-19 impacts, largely associated with client-initiated delays to work programs and shortages across client supplied materials, coupled with restrictions on movement and interstate travel bans, are now expected to continue for the rest of the year. The Group, therefore, expects the second-half result to be approximately in-line with the first half.

Key Risks:

The company is exposed to an unprecedented level of uncertainty due to the Covid-19 led restrictions. The increased restriction on staff movements, higher safety standards, and a fall in demand from the customers can impact the operations.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock has made a new low and has given a lower closing at $0.87 for the ongoing week. The technical indicator RSI with a reading around 22 suggests that the stock is in the oversold zone implying that there is limited downside while there could be potential technical buying.

Going forward, the stock may have resistance around the 23.6% retracement level of $1.21 whereas support could be around $0.80.

Stock Recommendation:

The company’s gross margin, EBITDA margin and net margin for H1FY21 stood at 94.5%, 9.6% and 4.0%, better than the industry median of 13.1%, 6.7% and 3.4%, respectively implying decent fundamentals of the company than the peer group. Its current ratio for H1FY21 stood at 1.44x, better than the industry median of 1.10x, implying decent liquidity position of the company than the peer group.

We have valued the stock using EV/Sales multiple-based illustrative relative valuation and have arrived at a target price that reflects a rise of low double-digit (in % terms). We have assigned a slight discount to EV/Sales Multiple (NTM) (Peer Average) considering fall in liquidity position and the risks related to COVID-19.

Thus, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.860 per share, up by 0.584% on 26^th May 2021.

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 Valuation has been achieved and subject to the factors discussed above.

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