Another Buy Rating For NRW Holdings

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

 – JP Morgan initiates on NRW Holdings With Overweight
 – Adds to consensus Buy ratings on the stock
 – Earnings growth outlook and good track record are attractions
 – Moves to diversify earnings offer some risks

By Chris Shaw

Australian mining services companies have attracted increased investor interest for some time, in part reflecting a solid earnings growth. An example is NRW Holdings ((NWH)), which prior to today scored a perfect six-for-six Buy rating score from brokers in the FNArena database.

Another positive view has emerged with JP Morgan today initiating coverage on the stock with an Overweight rating. The broker is positive on the stock for two reasons, one being a good track record within the sector and the other being a strong earnings growth outlook.

With respect to the former, JP Morgan notes NRW Holdings has a good history in terms of delivery on contracts as well as contract wins with key blue chip clients in the sector. This has been built on a strong position in the Western Australian civil and iron ore mining services contractor market, which supports the current expansion into other commodity sectors such as coal and LNG as well as moves into new markets such as Queensland and West Africa.

An advantage NRW Holdings has in JP Morgan's view is the company can offer a range of services that stretch from developing new mines and production facilities as well as through the production phase.

Looking at the earnings growth outlook, J Morgan expects earnings per share (EPS) growth of 113% in FY12 and 20% in FY13. In forecasts terms this equates to EPS of 34.2c for FY12 and 41c in FY13, which compares to consensus estimates according to the FNArena database of 33.9c and 39.3c respectively.

Supporting this growth outlook is a strong balance sheet, which JP Morgan notes is allowing NRW Holdings to continue to invest in growth areas such as production drilling and blasting services. As well, the good track record of the company helps secure contracts at lower risk under negotiated terms, while JP Morgan also sees leverage to growth in capex and production in the group's markets. 

Further contract wins are a key near-term catalyst in JP Morgan's view, especially if the company can be successful in gaining contracts in new markets. Potential new contracts include iron ore deals with Rio Tinto ((RIO)) in the Pilbara and at Simandou, as Citi notes NRW Holdings is a preferred contractor for Rio Tinto in iron ore.

The push by NRW Holdings to enter new markets offers some operational risk in the view of RBS Australia as it will require new skills and expanded capabilities going forward, even though there is little risk to earnings through FY13 given contracts already in place.

In RBS's view NRW Holdings should outperform FY12 earnings guidance of a net profit of $91 million, while as with JP Morgan the broker also expects strong earnings growth in FY13. For the current year RBS has lifted its forecast to a net profit of $95 million, the broker seeing scope for a share price re-rating on the back of such a strong result.

Valuation suggests a re-rating is possible as on FY13 forecasts RBS Australia estimates NRW Holdings is trading on an earnings multiple of just eight times. JP Morgan similarly sees valuation support, pointing out the stock is trading at a discount of around 21% to its valuation of $3.90.

Dividends are another attraction, as on JP Morgan's estimates NRW Holdings offers a yield of 6.5% this year and 7.7% in FY13. Dividends are currently partially franked. 

JP Morgan's price target has been set a little above this at $4.08, which compares to a consensus price target according to the FNArena database of $4.28. Targets range from RBS at $3.96 to UBS at $4.85.

Shares in NRW Holdings today are higher in a stronger overall market and as at 10.30am the stock was up 6c at $3.16. This compares to a range over the past year of $2.06 to $4.36 and implies upside of around 38% relative to the consensus price target in the FNArena database. 
 

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