Everybody Loves… NRW Holdings

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 – Earnings growth outlook for NRW Holdings remains positive
 – Company is exposed to growth markets
 – Offers expansion potential into new markets and services
 – Citi initiates coverage with a Buy rating

By Chris Shaw

Civil construction and contract mining group NRW Holdings ((NWH)) had enjoyed a perfect three-for-three Buy ratings in the FNArena database and this has now expanded to four positive recommendations with Citi initiating coverage today.

Citi's Buy rating on NRW Holdings reflects both an attractive valuation at current levels and the positive of exposure to strong long-term demand drivers given operations in the mine construction and production sectors.

As Citi points out, the ongoing boom in capex for both greenfield and brownfield projects in both iron ore and coal is delivering strong growth to the civil construction operations of NRW Holdings. This trend should continue for at least the medium-term.

Also supportive for the medium to longer-term in Citi's view is that when the current capex boom matures as mines move from development to production, NRW Holdings will continue to benefit through its contract mining operations. As an example of this, Citi notes Australian production volumes of both coal and iron ore are forecast to more than double over the next 10 years. 

The final key theme for Citi stems from new business opportunities. The recently established Action Drill & Blast business continues to deliver strong profit growth for NRW Holdings, while Citi expects company management to continue looking at ways to expand vertically along the construction cycle and increase exposure to non-mining infrastructure construction.

While not in the FNArena database, Austock Securities also rates NRW Holdings as a Buy. This call is supported by what Austock notes is the quality client base of NRW Holdings, which includes the likes of BHP Billiton ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals ((FMG)).

As well, states Austock, the company offers good earnings visibility over the next 12-18 months, with risk to the upside from new contract wins. Recurring revenues from the mining services operations in particular offers good clarity to the earnings outlook for NRW Holdings in Austock's view.

Despite concerns over the global economic outlook stemming from the slowdown in China and the EU's debt issues and the pressure this has put on commodity prices, there has been little impact on earnings for NRW Holdings in recent months. A trading update last November highlighted this, as earnings guidance was lifted on the back of some increases to margins.

This prompted those already covering NRW Holdings such as UBS, RBS Australia and Deutsche Bank to lift earnings estimates, which resulted in increases to price targets. The consensus target according to the FNArena database stood at around $3.66 prior to Citi initiating coverage and rises slightly given Citi has set its price target at $3.73.

Citi also points out despite recent share price gains there is still relative value in NRW Holdings. At current levels the stock trades marginally below domestic peers on both an earnings multiple and EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) basis, while Citi suggests a premium of around 10% seems justified. 

Austock agrees NRW Holdings should trade on a premium multiple to peers, supported by a superior earnings growth profile through the next 2-3 years. Dividends are also reasonable, Citi's forecasting suggesting a fully franked dividend yield of 3.9% this year, rising to 4.5% in FY13 and more than 5.0% in FY14. Stockbroker Moelis also covers the stock with a Buy rating (price target $3.50).

Shares in NRW Holdings today are stronger and as at 12.20pm the stock was up 5c or a little more than 1.5% at $3.31. This compares to a trading range over the past year of $2.06 to $3.42. The current share price implies upside of around 10% to the consensus price target in the FNArena database.

 

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