NRW Holdings: Navigating The OneSteel Risk

Small Caps | Mar 05 2025

Despite strong first-half revenue growth for NRW Holdings, the outlook is clouded by lower margins and a key customer in administration.

-NRW Holdings' interim earnings disappoint
-Strong revenue growth, mining division margin weighs
-Outlook clouded by key customer in administration
-FY25 guidance implies an improving overall margin

By Mark Woodruff

Following four consecutive halves of solid margin expansion and despite strong first-half FY25 revenue growth, mining services company NRW Holdings ((NWH)) revealed softer-than-expected interim earnings, driven largely by a poor earnings margin in the Mining segment.

While ongoing momentum in contract awards represents a positive catalyst for the stock price, and FY25 earnings guidance implies an improvement in second half margins, broker Moelis feels upside is limited by uncertainty around exposure to OneSteel Manufacturing Pty Ltd, after the South Australian Government appointed administrators.

Based on FY24 financials, the OneSteel contract contributes around 12% ($200m) of Mining segment revenue for NRW, and just shy of 20% ($26m) of that division's earnings (EBIT), highlights Jarden.

Engaging in the provision of civil contracting and mining services, NRW has three divisions: Mining, Civil, and Minerals, Energy & Technologies (MET).

Contracting is diversified across multiple commodities and infrastructure, and NRW is relevant across the entire lifecycle of a development project from studies to construction, as well as maintenance and operations.

During the first half, Morgans explains the key Mining division was weighed down by weather, a scope reduction at the Curragh coal mine owned by Coronado Global Resources ((CRN)), and cancellation by Arcadium Lithium ((LTM)) of the Mt Cattlin project.

First half earnings (EBITA) rose by 5.3% on the previous corresponding period to $96.9m, missing the consensus forecast by -4%, with a D&A charge causing the profit (NPATN) result of $58.4m to also fall -8% short of consensus.

The Civil and MET divisions performed well during the first half, Morgans comments, delivering year-on-year earnings rises of respectively 76% and 25% to $21m and $27m.

Macquarie notes revenue growth in Civil was driven by strong demand conditions and robust growth in new project awards, and points to a strong remaining pipeline of opportunities within the MET division across iron ore, gold and rare earths.

Management improved its revenue guidance range for FY25 to $3.3bn from $3.2bn, after first half revenue advanced by 16% year-on-year to $1.65bn. Morgans observes earnings (EBITDA) were similarly strong in the half at $189m, up by 20%.

Ongoing sequential improvement was evident for active tenders, increasing to $6.2bn from $5.5bn at the end of FY24, while the order book also grew to $6.8bn from $5.5bn, with a broadly stable pipeline, notes Moelis.

A fully franked interim dividend of seven cents was declared, a rise of 7.7% on the previous corresponding period.

Margins

Returning to the pandemic-era lows of the second half of FY22, NRW delivered a first half EBITA margin of 5.9%, down -60bps from the year earlier.

Civil delivered 41% revenue growth to $418m with the EBIT margin expanding by 100bps to 5.1%, while the MET segment delivered 25% EBIT growth at a margin of 6%, up 50bps from the previous corresponding period.

By contrast, Mining earnings fell by -8% year-on-year to $64m as the margin declined by -110bps to 7.9%.

Management reconfirmed FY25 guidance for earnings (EBITA) in the range of $205-215m, though UBS expects the lower end at $206m to be more attainable, assuming improved execution in the second half.

According to Jarden, guidance implies an improvement in second half margins, particularly for the main Mining division, and ongoing strength in the MET and Civil segments.

Unfortunately, this broker is far less optimistic, as FY25 guidance takes no account of potential irrecoverable amounts from OneSteel, and the impacts are unclear on long-term Mining segment EBIT margins, which are unlikely to reach the FY24 peak over the forecast period to FY27, in the analysts' view.

Also, Jarden believes caution around the group EBIT margin outlook (largely driven by Mining) will likely trigger negative core EPS revisions by consensus.

For the second half, UBS forecasts broadly flat half-on-half revenues, but with an 80bps EBITA margin improvement to 6.7%.

Exposure to OneSteel

NRW requested suspension of trading in its shares on February 21 (since lifted) as the company assessed the impacts of OneSteel being placed into administration.

Subsequently, management has provided no assessment of the potential financial impacts (write-offs/bad debt provisions) on second half financial results.

Morgans assumes the mining contract will continue as planned and forecasts no recovery of the receivables. However, this broker suggests new ownership at Whyalla could ultimately have a positive impact once matters are resolved, as this mining contract has historically been seen as the highest risk.

Management provided limited information on the path to settling the outstanding claims against OneSteel, Jarden notes, only mentioning NRW has options for enforcing its security, which holds enough value to recover the $113m owing.

Jarden estimates total receivable from OneSteel to be roughly equivalent to around 25 cents per share for NRW.

With NRW's balance sheet on a strong footing, the analysts see the 'unrecoverable amounts' as having a modest, temporary impact on NRW's financial position and financial leverage.

Citi thinks NRW's position, apart from a guarantee and first ranking security, is likely to remain opaque for some time, and downgrades its rating to Speculative Buy from Buy.