Industrials

The market yawns at NRW Holdings’ $878m in new contracts: Is the labour shortage overhang still warranted?

Mon 04 Jul 22, 4:34pm (AEST)
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Key Points

  • NRW Holdings announces $878m in new contracts
  • Macquarie downgrades the group to Neutral due to labour headwinds, and increasing competition, continuing to impact margins
  • The group's FY22 earnings guidance may end up looking conservative

NRW Holdings (ASX: NWH) received a relatively cool market reaction after the diversified provider of contract services to the resources and infrastructure sectors announced that two of its subsidiaries had bagged $878m in multiple mining contracts.

Given the magnitude of the staffing challenges experienced across the mining sector, and especially in the Pilbara, the market may be reserving its judgement on whether new, existing and future projects might be compromised.

This may go some way to explaining why the mid-cap contractor’s share price was only up around 2.35% after lunch today.

Overhang

What may have created something of an overhang for the stock was last week’s downgrade to Neutral from outperform by Macquarie: Target price decreases to $1.80.

Much of the broker’s downgrades across its mining services outlook are due to cost and labour headwinds, and increasing competition, which are continuing to impact margins.

While Macquarie acknowledges that renewed spend in iron ore in the Pilbara is a key catalyst for NRW Holdings, the broker also suspects developments are 6-12 months away, leaving risk of a short-term earnings gap. 

What may also be playing on the minds of investors is underlying weakness in the iron ore price, with the  Office of the Chief Economist (OCE) forecasting iron ore prices to decline to lower "long-run levels", with prices to average US$85 in 2023 and US$70 in 2024.

Contracts

The group is a no stranger to winning contracts, and at the half year increased its order book by $4.3bn and pegged the near-term tender pipeline capable of being awarded in the next 12 months at $19.5bn.

Adding to the group's order book today, management announced that subsidiary Golding Contractors, has won a five- and half-year mining services agreement with Wonbindi Coal at the Baralaba North mine.

The contract started last Friday (1 July 22) and is valued at around $800m.

Then there’s the subsidiary, DIAB Engineering, which has also been awarded two contracts to a value of around $78m.

While one of these contracts is with Lynas Rare Earths’ (ASX: LYC) processing facility in Kalgoorlie, the other is with Rio Tinto (ASX: RIO) iron ore to secure the supply, fabrication and installation of multiple dust suppression systems to be used at the Tom Price and Western Turner crusher and conveyor systems.

The project will run for about 12 months and employ 60 people at its peak.

Recent results

At the half year, revenue of $1,160.0m and earnings (EBITDA) of $133.6m were in line with guidance, while earnings (Operating EBIT) was up 26% to $74.6m at the high end of guidance.

Most of the expected FY22 mining-related revenue is now secured following extensions at Curragh, Phosphate Hill, Baralaba, Kogan Creek and South Middleback Ranges.

Full year earnings (EBITA) is expected to come in at the top end of the guidance range of between $150m to $155m.

An interim dividend was declared at 5.5 cents per share (CPS) fully franked, up 37% on the previous period.

image
NRW Holdings share price over 12 months.

 

What brokers think

While the group’s share price is up 17% over 12 months, its has been losing ground since early June from $1.98 to $1.71 last week, before bouncing marginally higher today.

Given that the business still has opportunities, the decision to maintain top end of guidance, may end up looking somewhat conservative.

Today’s treatment of the group’s announcement should remind investors that the market sees what it wants to see.

For example, compare the market’s Ho Hum reaction to the company’s announcements today with the euphoria dished out to shipbuilder Austal (ASX: ASB) last week on the back of what might be a $3.3bn contract with the US Coast Guard.

Based on the technical issues that have confronted Austal on recent projects, assuming this latest $3.3bn contract is bankable appears a little premature.

Meantime, consensus on NRW Holdings is Moderate Buy.

Based on the two brokers covering NRW Holdings the stock is currently trading with 23.6% upside to the target price of $2.15.

Based on Morningstar’s fair value of $2.20 the stock appears to be undervalued.

UBS expects the group to achieve full year earnings of $154m and expects an easing in tough labour conditions to offer further upside risk. 

The broker retains a Buy rating with the target price increasing to $2.50. (18/02/22).

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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