NRW Holdings Kicks Off With Iron Ore Win

This story features NRW HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: NWH

NRW Holdings has won the first of several earthmoving contracts expected from the re-investment in iron ore in Western Australia and brokers suggest the stock is a good way to play the cycle.

-South Flank smaller than works likely to be awarded by Rio Tinto, Fortescue Metals
-Revenue estimates for FY19 suggest growth of 40% on FY18
-Brokers more confident in NRW's ability to win further work in Pilbara
 

By Eva Brocklehurst

NRW Holdings ((NWH)) has been awarded a $176m contract to provide bulk earthworks and concreting at BHP Billiton's ((BHP)) South Flank iron ore project in Western Australia, kicking off a round of work awards expected over the next three years.

Work on South Flank is expected to start in September and run for 15 months. No material capital expenditure is expected as equipment will be internally sourced. UBS expects a 50:50 split in revenue across FY19 and FY20.

The broker's FY19 estimates of work in hand increase to $963m for revenue guidance of $1.1bn, implying 86% revenue coverage. UBS has set margin expectations for the civil division below industry targets, i.e. 4.2% versus 5%, which provides a level of confidence around the earnings profile.

The broker expects $3bn in civil works to be offered during FY19-21 from replacement and sustaining capital expenditure in Western Australian iron ore. South Flank is the first major iron ore project to award civil contracts but its civil works are materially smaller than the projects likely to be emanating from Rio Tinto ((RIO)) and Fortescue Metals ((FMG)).

UBS expects works for Rio Tinto's Koodaideri and Fortescue's Eliwana will be awarded towards the end of the first half of FY19. Collectively, the broker calculates the civil works for these projects which NRW Holdings can address are worth around $1.6bn.

The broker currently assumes an overall win rate of around 21% for the company. A 33-50% win rate would drive a 12-29% uplift to FY20 EPS estimates, all else being equal. UBS has a Buy rating and $1.90 target.

Moelis upgrades estimates for operating earnings (EBITDA) for FY18 and FY19 by 2% and 9% respectively on the back of the win. The broker's revenue estimate of $1.11bn is in line with recent company guidance and represents revenue growth in excess of 40% over FY18.

Moelis considers the stock one of the better ways to play the upcoming reinvestment cycle in Western Australia and for gaining exposure to the potential for further contracts to be awarded over coming months from Fortescue Metals and Rio Tinto. Nevertheless, the broker considers the risk/reward balanced and moves to a Hold rating on valuation grounds, with a target of $1.87.

Citi maintains a Buy rating and $1.95 target, now more confident regarding the company's ability to capitalise on the increase in iron ore expenditure in the Pilbara. Citi increases FY19-20 estimates for net profit by 2-5%.

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