NRW Holdings Still A Yield Favourite

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 – NRW Holdings reiterates FY13 revenue guidance
 – Softer second half performance is implied
 – Competitive environment pressuring margins
 – Yield underpins value

By Chris Shaw

An update from engineering and contracting group NRW Holdings ((NWH)) included reiteration of revenue growth for FY13 of 15%, which implies a softer second half given first half revenues are expected to be around $800 million.

As Citi notes, the softer second half reflects the loss of revenues from Fortescue's ((FMG)) Solomon project and BHP Billiton's ((BHP)) Inner Harbour project. For the full year NRW Holdings now has $1.3 billion of revenues secured by contracts, which means $263 million in work must still be one to meet guidance.

This is most likely to come from the Civil or Drill & Blast divisions, where work continues to grow strongly. In contrast, Deutsche Bank suggests the Mining division is likely to be down slightly in year-on-year terms.

To reflect the more competitive conditions Deutsche has trimmed earnings estimates, this given the factoring in of more conservative operating margins. Forecasts for FY13 have been cut 5% and in FY14 by 15%, while Citi in contrast makes only minor changes to its model.

Consensus earnings per share (EPS) forecasts for NRW Holdings according to the FNArena database stand at 39.2c for FY13 and 40.3c for FY14. The changes have impacted on Deutsche's price target, which falls to $2.75 from $3.50. This is more in line with Citi's unchanged target of $2.65, while the consensus target in the FNArena database stands at $3.34, with more broker revisions likely ahead.

With further contract wins needed to ensure revenues meet expectations for the year, Deutsche suggests this could be achieved via acquisition. A strong balance sheet makes such acquisitions possible and Deutsche estimates $800 million of new debt-funded work would be accretive to FY14 earnings by around 7%.

Post the update from NRW Holdings, Citi notes its earnings forecasts for FY14 are around 10% below consensus. Even given this, the broker suggests NRW Holdings appears cheap, as the earnings multiple for FY14 would be just over 5.0 times.

Investors are also paid well for holding the stock, as Citi's forecasts imply a full franked dividend yield of more than 10% for FY13 through FY15. Deutsche's dividend forecasts are slightly higher and imply a yield of just over 11% in FY14.

Both Citi and Deutsche continue to rate NRW Holdings as Buy, while overall the database shows the stock is rated as Buy five times and Hold twice. RBS Australia downgraded NRW Holdings to a Hold rating last month given less confidence in FY14 expectations, which now appears justified given the latest update.

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