NWH – NRW Holdings Limited

NRW Holdings Limited (ASX:NWH) provides diversified services to Australia’s resource and infrastructure sectors through our three business divisions being NRW Civil and Mining, Action Drill and Blast and Action Mining Services.

NRW Civil and Mining is the contractor of choice within Australia’s resources and infrastructure sectors.

NRW delivers high quality civil projects, including earthworks and concrete projects, as well as coal and iron ore mining services contracts throughout WA’s Pilbara region and Queensland’s Bowen Basin.

Action Drill & Blast is the fastest growing drill and blast contractor in Australia. The company prides itself on its friendly, professional and efficient contract drill and blast services to premier mining (including iron ore and coal mining) and civil companies throughout Australia.

Action Mining Services offers a complete one-stop-shop for all services to the mining and resources industries.  The Company’s workshop facilities include one of the largest undercover workshops in WA which is equipped with the latest technology.

NRW was founded in Kalgoorlie in 1994 by three guys with an idea and some earthmoving equipment.  In 2007, the company had grown significantly and listed on the Australian Stock Exchange.

Does this business have a sustainable competitive advantage?
NWH enjoys very strong relationships with each of the major Australian mining companies being BHP Billiton, Rio Tinto, Fortescue Metals and Hancock Prospecting.  These relationships were built in the early to mid 2000’s.  The company has also expanded and now services companies in the LNG market such as Chevron.

These relationships helped the company secure a forward order book of $1.35 Billion as of February.  And, with $257 Million of new contracts announced in April, at a profit margin of 6%, this gives forward earnings for 2014FY in the vicinity of $102 million or 36 cents a share.

The company has also presented that it has current active tenders approximately worth $4 Billion.  The breakdown of this is:

Civil: $2.85 billion
Mining: $1.0 billion
Drill & Blast: $347 million

And the company will have the opportunity to tender for a further $9 Billion worth of new projects in iron ore, coal, LNG, government infrastructure and international projects in the foreseeable future.

What are the risks facing this business?
The biggest risk is the talk of a China slowdown causing some of these projects to be cancelled or delayed.  The risk is real however, the situation in general does appear overblown by media speculation. The media presents a panic situation when the quarterly growth rate drops from 7.9% to 7.7%.  If you consider that the world’s second largest economy is growing at over 7% per annum, their need for our raw materials is not going to stop any time soon.

The company earned 17.7 cents a share in the first half of 2013 financial year so the second half of the year will be light on.  However, the sell-off in the past two months looks like an over-reaction to this lower earnings guidance for the second half of 2013 financial year.

Is it run by able and trustworthy management?
Management run the business with a conservative balance sheet with a net-debt-to-equity ratio of 8% as of December 2012.

NRW Holdings has a lot of flexibility in managing their workforce depending on the amount of work at hand.  In September 2012, they had over 4,500 people working on projects. By January 2013, they had just over 3,100.  A portion of NRW’s work force is labour hire and sub-contractors.  This means that the company his flexibility and means that NRW Holdings do not have excessive labour costs and can scale their work force with the current amount of work on hand.

It appears management built the company on a foundation of quality work that has developed strong relationships with some of our largest companies.  With their share in converting the potential $4 Billion of work on the table across civil, mining and drill & blast divisions, the company should continue to maintain a strong order book into FY14 and FY15.

Is it trading at a bargain price?
As of May 2013, this company is the cheapest company with my Gold 1 rating based on fundamental analysis.

Company Code Rank 2012 Actual Valuation 2013 Actual Valuation Today’s Share Price Margin of Safety 2014 Forecast Valuation 2015 Forecast Valuation
NRW Holdings Limited NWH Gold 1 $5.26 $3.19 $1.57 47% $2.97 $3.36

*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

In summary, NRW Holdings is a great business with visibility of consistent earnings for the next two financial years.  It has a strong balance sheet, very good relationships with a number of large mining and LNG companies.  The business has been beaten down with many of its lesser quality peers and as a result has an awesome dividend yield.

This article is published by Dean Mico.

Disclosure: TheEdge Fund owns shares in NRW Holdings. Please do your own research. Anyone buying shares from this point in time forward will be helping our cause.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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