Australia | Sep 07 2012
– Fortescue's expansion deferral impacts on NRW's revenue forecasts
– Brokers do not see guidance reduction as material
– NRW offers service diversification and a very good yield
By Greg Peel
Mining and energy services provider NRW Holdings ((NWH)) has completed discussion with Fortescue Metals ((FMG)) in light of the deferral of the final stage of Fortescue's Pilbara expansion, and yesterday announced the impact to the market. NRW is contracted by FMG and work on the final stage was included as part of NRW's contract pipeline.
The contract cancellations relate to the tailings dam construction at the Kings Valley mine and also for general civil works at FMG's Solomon hub. NRW is treating the cancellations as just that at this stage, albeit FMG may reinstate its expansion plans down the track were the iron ore price climate to improve. The impact is a reduction in NRW's secured order book to $1.2bn from $1.3bn, and a reduction to the company's active tender & framework agreement pipeline to $2.6bn from $4.6bn, removing Christmas Creek II. The former $100m represents a specific loss of expected revenue, while the latter amount represents a less certain forecast.
As a result, NRW management has downgraded its FY13 earnings growth guidance to 15% from 15-20%. Not exactly the stuff to keep one awake at night. The bottom line is that while a few years ago this loss of an iron ore contract would have hit right at the heart of NRW, today the company boasts a far more diversified service pipeline. NRW has increased its exposure to actual production-related activities (as opposed to only development-related), notes UBS, and has diversified its commodity exposure into infrastructure, coal and, importantly, LNG. To UBS, NRW is a “different business” in this cycle compared to the last.
Management's revised FY13 revenue guidance is 77% covered by contracts, down from 80%, leaving $360m of new work to win, Deutsche Bank notes. Management sees no impact on NRW's FY14 outlook. The FY13 impact will be manageable, given the company will demobilise hired equipment and subcontracted labour and reposition company-owned equipment to other NRW projects. JP Morgan expects some reduction in permanent staff members and modest cutbacks to capex to reflect lower near-term workloads. JPM believes that growth in NRW's production mining services, such as drill & blast services, supports near-term earnings growth and will provide greater earnings stability over the medium term.
Indeed, Deutsche actually sees reduced exposure to FMG as positive in light of current developments. The analysts acknowledge that earnings visibility beyond FY13 is limited, but are happy to retain Buy.
JP Morgan retains Overweight, with the analysts suggesting that given the cost curve position of many of NRW's clients, they would expect continued capex spending as well as at least maintenance of production rates in the Australian resource sector. “We believe NRW remains well positioned to win available work and expand into new markets/services,” the analysts say, “given its strong reputation and good balance sheet position”.
Citi is also retaining its Buy rating, albeit the analysts have taken the opportunity to reduce their growth expectations for the Civil business in FY14 and beyond, given the falling iron ore price will potentially threaten the timing of other major near term projects such as Gina Rinehart's Roy Hill. The analysts are now assuming no growth for Civil beyond FY13.
Having said that, Citi points out that (as of yesterday's closing price) NRW is offering a 9.9% fully-franked yield to which the analysts see little near-term risk given a payout ratio of only 55% and a strong balance sheet featuring minimal debt.
Brokers have nevertheless trimmed their earnings forecasts as a result of reduced guidance. Not all FNArena database brokers have updated their views as of this morning so FNArena's Stock Analysis currently shows the consensus target having fallen to $3.72 from $3.92, albeit this figure may move a little lower next week. Never mind — the new figure still suggests 62% upside. Ratings from the major brokers currently stand at six Buys and one Hold.
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