Risk Seems To The Upside For NRW Holdings

This story features NRW HOLDINGS LIMITED. For more info SHARE ANALYSIS: NWH

Another record year has strengthened analysts’ confidence in the outlook for NRW Holdings, though a weakening iron ore price remains a risk.

-NRW Holdings delivers record result in FY24 and expects another record in FY25
-Target prices lift on increased confidence of further margin improvement
-All segments perform well, led by Civil division

By Nicki Bourlioufas

Strong order book prompts share price upgrades

A surge in tendering and an uplift in pipeline activity for NRW Holdings ((NWH)) highlights strong growth opportunities for the mining services company, with analysts upgrading target prices after the mining services company released strong annual results.

NRW announced earnings before interest, taxes, depreciation, and amortisation EBITDA of $334.8m in 2023-24, up 15.9% on the previous year, and normalised earnings per share (EPS) of 27.3 cents per share, up 17.7%.

The company announced a fully franked final dividend of 9.0cps, lifting total FY24 dividend to 15.5cps, up 11.1% on a year earlier. With a record headline cash position of $246.6m, a strong order book of $5.5bn and active tenders of a further $5.5bn, NRW’s growth pipeline for FY25 convinced most analysts to upgrade their target prices.

Citi upgraded its target price to $4.05 up from $3.65 with an expected dividend yield of 4.7% for the next fiscal year. The broker noted a surge in active tender balance and an uplift in pipeline, which demonstrates no shortage of opportunities even with respect to iron ore.

Jarden shifted to Buy from Overweight and increased its target price to $3.85 from $3.20. Similarly, Moelis increased its target price to $3.91 from $3.56, with a Buy rating, noting increased confidence of margin improvement in FY25. Momentum in contract awards and demonstration of margin improvement represented further upside risk in its view. Canaccord Genuity raised its target price to $3.82 from $3.47, noting the potential for NRW to win more contracts from iron ore miners, and potentially from gold miners too.

UBS also upgraded to $3.80 from $3.50, based on 8% Free Cash Flow (FCF) upgrades for FY25 and FY26 and margin improvement across every segment, highlighting stronger project delivery. Easing labour cost pressures will help to support future margin expansion, brokers said. NRW engages in the provision of civil contracting and mining services through three divisions: Mining, Civil, and Minerals, Energy & Technologies.  

NRW expects to deliver earnings before interest, taxes, and amortisation (EBITA) in FY25 of between $205m to $215m, which reflects another year of  10%-plus earnings growth, UBS noted, maintaining its Buy rating. On UBS’s projections, NRW offers a solid 12% three-year EPS compound annual growth rate (CAGR) while trading at an undemanding 12x forward price-earnings ratio (P/E).

NRW’s earnings guidance of around $3.1bn seems conservative with $2.9bn of revenue already locked in for FY25, analysts said. An improvement in retention rates and easing of inflationary pressure stabilising the cost base could widen its earnings margins in FY25 after they increased across all three divisions in FY24.

While most brokers are positive, Macquarie remains Neutral on the stock, with a target price of $3.50, though this broker notes further margin expansion and additional contract wins represent earnings upside risk. While NRW has sufficient balance sheet capacity to support growth, the broker noted risk from lower iron ore pricing with ongoing softness in the Chinese economy, a risk which has grown in recent days.

Strong pipeline of orders

NRW’s pipeline of near-term prospects is strong at $16.4bn, with $5.5bn of active tenders, and brokers noted risks to the upside for NRW’s orders and earnings margins. The majority of the company’s order book sits within its mining division.

Backing the brokers’ confidence of longer-term gains, NRW has outperformed the stock market in recent times. While the S&P/ASX 200 is up just 4.4% over the year to August 21, NRW stock is up around 17%. According to FNArena’s database, the consensus target price for NRW is $3.74, suggesting circa 6.6% upside to the last share price.

On current consensus forecasts, the forward-looking yield ex-franking is 4.5%, expected to increase to 4.6% in FY26.

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