Australia | Aug 27 2012
– NRW Holdings profit result better than expected
– Guidance implies further solid growth in FY13
– Updated guidance conservative in view of UBS
– Brokers remain positive, Buy ratings dominate
By Chris Shaw
Stronger revenues and higher margins drove a full year net profit result for civil construction and mining services group NRW Holdings ((NWH)) of $97.1 million, which was better than consensus and represented an increase of 136% in year-on-year terms.
Strong earnings growth is expected to continue, as management at NRW has guided to at least 15-20% growth in revenue and earnings for FY13. This guidance is likely to prove conservative in the view of UBS as NRW has a solid existing order book, a pipeline of opportunities and a management team with a strong track record in terms of execution.
UBS's earnings forecasts reflect this, as the broker expects a FY13 net profit after tax of $120.4 million. This would equate to earnings growth of 24%. In earnings per share terms UBS expects 43c in FY13 and 50c in FY14, which compares to consensus estimates according to the FNArena database of 41.1c and 43.7c respectively.
Longer-term solid earnings growth should continue according to Macquarie, as the outlook for core iron ore operations remains solid and NRW has recently expanded operations beyond iron ore into oil and gas and into the Queensland market.
There is also less earnings risk for NRW in the view of Macquarie, as the strategy of taking on a limited number of clients builds stronger relationships. Such an approach also lowers business development costs.
Credit Suisse has less confidence in the longer-term earnings growth outlook of NRW. The broker estimates if guided revenues for FY13 were met and held at that level for the following three years, NRW would need to successfully tender around 50% of the entire identified tender pipeline of around $13.4 billion.
There is little risk of shorter-term earnings disappointing, as Deutsche Bank notes revenue guidance for FY13 is a little more than 80% covered based on current projects under contract. With additional work likely to be won in iron ore, coal and energy markets Deutsche made modest increases to earnings forecasts for the coming year.
Changes to earnings estimates mean the consensus price target for NRW Holdings according to the FNArena database now stands at $3.92. This is down from $4.28, Macquarie attributing the cut in its target to $3.92 from $4.78 to a de-rating of peer multiples. Targets range from Credit Suisse at $3.10 to UBS at $5.15.
Brokers remain positive on NRW, as the database shows six Buy ratings and one Neutral recommendation. This is courtesy of Credit Suisse, who downgraded from an Outperform rating post the profit result on the back of a change in analyst.
One concern for Credit Suisse is what NRW looks like post peak earnings, which the broker suggests may become an increasingly important consideration for investors given current economic uncertainties.
UBS sums up the Buy argument for NRW, seeing the stock as attractive at current levels given the combination of an attractive earnings multiple and fully franked dividend yield and a solid earnings growth outlook through FY16.
While there is some need to diversify earnings given a current strong focus on the iron ore market, RBS Australia suggests the solid track record of NRW and the currently undemanding valuation offer enough compensation for investors in the meantime. For RBS, this justifies a Buy rating.
Shares in NRW Holdings are higher in a stronger overall market and as at 12.00pm the stock was up 7c at $2.96, which compares to a range over the past year of $2.08 to $4.36. The current share price implies upside relative to the consensus price target in the FNArena database of a little more than 30%.
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