Australia | Nov 24 2011
– NRW Holdings lifts guidance
– Increases reflect margin improvement
– Brokers lift earnings estimates and price targets
By Chris Shaw
Civil construction and mining services company NRW Holdings ((NWH)) delivered positive earnings guidance yesterday, management's expectations for the first half of FY12 and for the full year coming in ahead of market forecasts.
Management has guided to interim revenues of $580-$610 million and net profit after tax of $41-$43 million, with similar expectations for the second half of the year. This implies full year revenues of $1.16-$1.22 billion and net profit of $82-$86 million, which compares favourably to the previous estimates of UBS of $1.15 billion and $73.1 million respectively.
Driving the increase has been margin improvement, as UBS notes the new guidance implies an EBIT (earnings before interest and tax) margin of 10.8%. This is up from the 8.7% achieved in FY11 and compared to UBS's previous estimate of 10.1% for FY12.
RBS Australia attributes the margin improvement to negotiated contract rates, Middlemount plant mobilisation and a ramp-up at the plant and some gains from recently negotiated contracts.
The better than expected guidance has seen increases to earnings forecasts across the market, with UBS lifting its earnings per share (EPS) numbers by 10-14% through FY14. Deutsche Bank has been even more aggressive in increasing its net profit forecasts by 25% for FY12 and by 18% for FY13, while the increases put through by RBS Australia are broadly in line with those of Deutsche Bank.
Post the update, the FNArena database shows consensus EPS estimates for NRW Holdings of 30.3c for FY12 and 34c for FY13. This compares to the 16.1c earned in FY11.
Changes to earnings estimates mean increases to price targets, RBS lifting its target to $3.37 from $3.08, Deutsche to $3.50 from $3.10 and UBS to $4.10 from $3.75. The consensus price target for NRW Holdings according to the database now stands at $3.66, up from $3.31 prior to the update.
There are no changes in ratings post the update, all three brokers in the database covering NRW Holdings rating the stock as a Buy. For RBS there remains upside potential from a strong pipeline of proposed mining capital expenditure over the next two years, which should support the group's order book.
As well, RBS notes NRW Holdings has a blue chip client base and a solid track record, while there is also a high level of earnings visibility with respect to near-term earnings. The current share price offers value according to RBS, the stock trading on a FY12 earnings multiple of around 9.3 times.
UBS also sees value, pointing out while the share price of NRW Holdings has risen by 28% this year, which is outperformance relative to the Small Ords index of nearly 50%, EPS forecasts have been increased by 42-43%.
As UBS points out, this implies a valuation de-rating of around 10%, something the broker suggests is not justified given the solid capex outlook for the sector and the good relationship of NRW Holdings with key customers.
It is a similar argument from Deutsche Bank, as on its numbers NRW Holdings is trading on a FY12 earnings multiple of just 8.8 times and for FY13 of 9.9 times.
Shares in NRW Holdings today are slightly higher and as at 12.30pm the stock was up 3c at $2.81. This compares to a trading range over the past year of $1.66 to $3.09. The current share price implies upside of around 33% to the consensus price target in the FNArena database.
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