In Brief: Northern Star, Worley, Bravura & Big River

This story features NORTHERN STAR RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: NST

Northern Star reaches for a tier one asset, Worley suffers from economic/political uncertainty, Bravura ups the earnings ante and Big River runs deep into a cyclical housing downturn.

-Northern Star still shines bright
-Worley reiterates FY25 earnings guidance
-Bravura upgrades earnings guidance
-Big River geared to a housing cycle upswing

By Danielle Ecuyer

Quote of the week comes from Dr Shane Oliver at AMP:

“Just as trees don’t grow to the sky, 20% plus returns from global shares are not sustainable. So, we expect good investment returns over 2025, but it will likely be a rougher and more constrained ride than in 2024.”

Quality asset extends gold production 

Northern Star Resources ((NST)) entered the spotlight this week with an all-scrip takeover offer for De Grey Mining ((DEG)) at $2.08 per share, valuing the transaction at approximately $5bn based on last Friday’s closing price. The deal grants Northern Star access to the tier-one-rated Hemi gold project.

J.P. Morgan supports the deal, viewing access to Hemi, with a 12-year mine life and expected production of over 530kozpa in the first decade (553koz in the first five years), as a favourable outcome.

Hemi has the potential to increase Northern Star’s gold production to 2.5moz as a base case while reducing all-in-sustaining costs over time. Additionally, underground production at Hemi could boost longer-term output to over 800kozpa.

The broker anticipates a final investment decision by mid-2025, with approvals assessed as low risk. Project ramp-up is targeted for FY29, and Northern Star’s balance sheet is deemed sufficient to fund the project, with peak capex expected in FY26.

Gold Road Resources ((GOR)), holding a 17.3% stake in De Grey, has yet to comment. Closure of the scrip offer would result in Gold Road holding a circa 3.4% stake in Northern Star.

J.P. Morgan maintains a Buy-equivalent rating on Northern Star, with the target price reduced by -5% to $17.25. Gold Road is downgraded to Hold-equivalent from Buy-equivalent, as the stock is seen as fully valued. The target price increases to $2.10 from $2. De Grey’s target price is raised to $2.05 from $1.75.

Investors don’t believe earnings guidance

After a decline of -21% in the share price over the last 12 months, Goldman Sachs does not waver in its assessment of the Worley ((WOR)).

The recent AGM update confirmed double-digit earnings growth for FY25 guidance while highlighting the impacts of political and economic uncertainty weighing on growth.

On a risk/reward basis, the broker believes the current valuation of around 14.5x consensus FY25 earnings represents a -23% discount to the ASX200 and the company’s historical 1% premium over a 10-year period.

Worley is well-positioned to capitalise on the energy transition to more sustainable fuels from fossil fuels, the broker suggests.

The company’s expertise in engineering and maintenance services, including solutions for complex energy and chemical projects, is viewed positively. Management has outlined its strategic intent to increase exposure to the energy transition.

However, the market appears cautious about corporate capital expenditure plans in Worley’s core markets. General uncertainty regarding major projects and their timing has, in Goldman Sachs’ view, contributed to the share price underperformance.

With management reiterating guidance, the broker has considered earnings forecasts and believes the risk/reward profile remains favourable. The stock is rated Buy with an $18 target price.

Now show me the top-line growth

Oh, to be plagued with “(Yet) An(other) Upgrade”, says Wilsons, as Bravura Solutions ((BVS)) lifted guidance across financial metrics for FY25 (again!).

If FY24 was the year of stabilisation, then FY25 is viewed as the year for rebuilding confidence, according to the broker, and FY26 will “hopefully” be the year of more contract wins.

The latest upgrade reflects management’s ability to execute successfully on strategic targets and led Wilsons to raise earnings forecasts by 10% and increase the target price by 40% to $2.06.

Bravura also reconfirmed its $20m buyback intention and a $73m capital return, or 16.3c per share, to be paid on January 30. Much of the capital return has been generated from a circa $56m one-off license fee from Fidelity.

With a strengthened balance sheet and ongoing cash generation, dividend payments are expected to recommence in February 2025 with the 1H25 results.

Wilsons remains Buy-equivalent rated and believes investors will be looking for a return to top-line growth.

A highly levered earnings play into a building recovery

FNArena reported on Metcash Holdings ((MTS)) this week, highlighting challenges in the hardware business due to weakness in the housing/building sector.

A similar theme applies to small-cap Big River Industries ((BRI)), which was the focus of Taylor Collison’s initiation of coverage.

Big River manufactures and distributes timber products across A&NZ, serving commercial, residential, and civil construction markets with veneer, plywood, and formwork products.

Queensland, NSW, and Victoria generate over 75% of revenue. Direct imports now exceed locally sourced supplies and in-house manufacturing. Detached housing is the largest sector exposure at 39%.

The broker views Big River as a robust player in what it considers a fragmented market. Management has pursued add-on acquisitions to enhance through-the-cycle organic growth, acquiring 15 companies since its 2017 IPO. Incrementally, these acquisitions have boosted revenue by $210m at the time of purchase.

However, the analyst warns against overzealous acquisitions in an increasingly competitive consolidation landscape. Maintaining long-term returns on funds employed between 15%-17% and acquisition costs around 3-5x enterprise value to earnings is deemed critical.

Taylor Collison assigns a Hold rating, citing historically low levels of residential building activity and the need for greater confidence in market stability before upgrading to a Buy-equivalent rating.

While a valuation discount compared to building material peers is warranted, the current -36% discount is considered excessive.

However, further widening of the discount is possible, potentially presenting a more attractive entry point later in FY25. The broker sees the stock as a compelling cyclical play, with the timing being the key question.

For more reading on housing related company Metcash: https://fnarena.com/index.php/2024/12/04/metcashs-earnings-geared-to-housing-recovery/

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