NWH.ASX - NRW Holdings

[frommi]

This is a small australian mining service company. They built roads and tunnels for the big players like Rio Tinto or BHP.

Plunged by 50% after the last numbers, but the number where not that bad.

 

Numbers:

 

PE: 6.6

P/B: 0.86

Marketcap: 312 million AUD.

Div. Yield: Around 8% when they can hold the results of the last half years

EV/EBITDA: 2.6

 

They operate in 4 divisions that are all EBIT positive. What i found impressive is that they were able to reduce their workforce by 50% in one year.

Order backlog of around 1 billion AUD. Debt of around 200 million AUD and 170 million AUD cash, that should be enough to weather the next storms.

 

Annual reports:

 

http://www.nrw.com.au/Investors/Annual-Reports.aspx

 

I always liked the idea of selling shovels to the diggers, perhaps thats the reason i like this company. I already built a 4% position at IB and bought directly in Sydney.

[Green King]

This is a small australian mining service company. They built roads and tunnels for the big players like Rio Tinto or BHP.

Plunged by 50% after the last numbers, but the number where not that bad.

 

Numbers:

 

PE: 6.6

P/B: 0.86

Marketcap: 312 million AUD.

Div. Yield: Around 8% when they can hold the results of the last half years

EV/EBITDA: 2.6

 

They operate in 4 divisions that are all EBIT positive. What i found impressive is that they were able to reduce their workforce by 50% in one year.

Order backlog of around 1 billion AUD. Debt of around 200 million AUD and 170 million AUD cash, that should be enough to weather the next storms.

 

Annual reports:

 

http://www.nrw.com.au/Investors/Annual-Reports.aspx

 

I always liked the idea of selling shovels to the diggers, perhaps thats the reason i like this company. I already built a 4% position at IB and bought directly in Sydney.

 

You can't value this company by p/e or EBIDTA. you have to know or have a idea of what the future is going to look like. what is it going to look like ?  be careful.

[frommi]

They had revenues of 500 million in the last half year and with the backlog they should be able to reach the same numbers in the next half year. Their contracts are multi year so the cashflows should not end abrupt. And i don't think the world will stop using iron or coal in the next decade, so this business should stay.

[yadayada]

i get a PE of 4.4? 74 million of net income right, and FCF looks pretty good as well.

 

Also how easy is it to scale this down? more then half their costs are worker costs. They probably work on short term contracts?

 

edit: oh i see. It seems they start talking about order book in H14, but i dont see that in H12. How do you know it wont be bad 4 years from now? They grew alot in the past 7 years. It might be very cyclical? at a current 6.6pe, there doesn't seem enough margin of safety.

[frommi]

As i wrote they were able to decrease their workforce by 50% from 2012->2013, but that was exactly how much they increased it in the prior year. So that were probably short term contracts. I doubt that they can decrease their workforce at the same pace when they have to do it. But for 2014 they already hired more people, so their order backlog seems to be stable.

 

Source and last half year results: http://www.nrw.com.au/getattachment/094fa734-25ff-419d-8572-d82d39b5ce15/FY2014-Half-Year-Results.aspx

 

Competitors are:

 

Monadelphous: P/E: 10, P/B: 4.5, EV/EBITDA: 5.7

Leighton Holdings: P/E: 13, P/B: 2, EV/EBITDA: 4.02

 

 

Thats more than 70% upside, i see the fair value somewhere above 2$ (1.12$ at the moment). My forward rate of return for this is around 29% with 5% growth and an 8% dividend yield.

[frommi]

Ok, my initial margin of safety was not big enough. But now this company trades around my estimation of liquidation value with an FCF/EV of 32%. Roy Hill is running out next year, so in a year the liquidation value should be 30% higher.

For liquidation value i removed all intangibles, goodwill and asssumed that they can get 50% for the machinery and materials. Given that their clients are big companies like Vale and Rio Tinto, should i also reduce accounts receivables?

 

I don`t see how i can lose money from here now except through some hostile management decisions, can someone enlighten me? :)

[mjohn707]

Don't know anything about this situation but in the 1st edition of security analysis Benjamin graham would use a range of 1-50% for fixed and misc assets (including equipment) in a liquidation, with a rough average of 15%. 

 

He would discount receivables by 10-25% too.  This page has an excerpt from the 2nd edition of security analysis that looks similar to what I read in the first edition:

 

http://www.gurufocus.com/news/233161/benjamin-graham-on-liquidating-value

[frommi]

Thanks. But do you discount the assets also when 60% of this equipment is leased?

My logic tells me that it would be a good idea to just reduce the part of the assets that are not leased.

 

 

 

[mjohn707]

in a graham style liquidation you would discount all the equipment by that rate. 

 

I could see how you could argue that if the leases are non-cancelable they should at least be treated like retail receivables and you could value them at 30-60% of face value.

 

 

[frommi]

The stock was excluded from the ASX200 in september and has lost 50% since then while the fundamental situation has not changed. Together with tax loss selling this is now a huge opportunity in my  view. Of course the future after 2015 is very unclear. The one risk i see is if one of their clients doesn`t pay for whatever reason.

There is a discussion at http://hotcopper.com.au/asx/nwh about this stock.

[yadayada]

I like emeco or BOOM better.

[frommi]

I like emeco or BOOM better.

 

I see a lot more value in a going concern valuation for NRW than for BOL or emeco. And the balance sheet looks safer with a net debt of only 30 million. I am pretty sure that when they report the next time they have a net debt of 0 while still paying out a dividend. I mean they build roads and raidroads, in theory they should even be able to build civil infrastructure for the government. (and from what i read they work on getting contracts there).

They just invest into new machinery (and hire people) when they need that for projects that they already won, so they have very little capex needs when there are no new projects. The CEO already hinted into that direction that capex will be low the next years, so nearly everything in cashflow that comes in is free cashflow. EV/EBITDA is just at 1.5 at the moment, when they can stabilize their revenue going forward even at half of current revenue they should be able to get EBITDA of around 40-50 million. And you get this now for 150 million with the option of getting around 100 million again in H2 2014 and H1 2015. Management has the right incentives (EPS growth, ROCE, total shareholder return) and is good at capital allocation when i look at their timing of the IPO in 2007 and a capital increase in 2011 both times at the height of the resource boom. There is a stockholder meeting next week where the CEO wants shareholder agreement for a plan to have nearly half of his pay in stock, when i understood it correctly.

I don`t want to say that this business has a moat but they have business relations with all major mining companies in australia, that surely helps in getting contracts.

 

So for me with this business time is on my side because they are still growing net assets, while BOL and emeco are a race against time. But perhaps i just ignored something or i am blind to see it, but for me the index exlusion is a big hint that this stock is clearly mispriced now. Did i look too long at this and fell in love or i am unreasonable in my assumptions? (I think when the dust settles this is worth around 2 AUD, current price is at 0.55 AUD.)

[yadayada]

At least EHL is a going concern. They are not in liquidation.

 

Edit: Hmm did not see it almost halfed in price. It looks a lot more interesting now indeed. Allthough im worried about the 2 parts of the mining cycle. One is building mines, and two is the actual mining itself. Isn't this company mostly involved with the first one? Also margins look really bad. A little squeeze in business and they could be losing tens of millions a year?

[frommi]

How can you lose money on project work where you know your profit upfront? Thats only possible when your costs are rising (the opposite is happening now), or when your clients don`t pay you. (That is the real threat here, but i attached a very low possibility to it because their clients are all stable and mature companies.)

[frommi]

Looks like i should have attached a higher possibility to the "clients don`t pay" scenario.

They have problems with Samsung paying here and they will write down goodwill and asset values by around 50 million while net debt is unchanged. They are progressing on securing infrastructure work for the government is the only slighlty positive development here. But the stock is still cheap with 130 million marketcap on ~320 million asset values. (after the impairment)

I think i will scale my position up here in the next days. But perhaps i am better of just cloning other peoples ideas.

 

http://hotcopper.com.au/documentdownload?id=uOMxKKzFkiWRTLKhOROKAxjvTUcL4g2%2Bpm6RqJlJ2%2Fk%3D

http://hotcopper.com.au/documentdownload?id=uOMxKKzFkiWRTLKhOROKAxjvTUcL4gy1pm6RqJlJ2%2Fk%3D

[Myth465]

I am looking at this for my asx account.

[lathinker]

I was wondering if anybody looked at NRW recently. Since last the post in this forum, it is again down by >60%.

 

What happened?

- NRW posted H1 2015 results. Revenue 570mm AUD, EBITDA of 2.7mm AUD, Net earnings -120.6mm

- No profit margin recognized on Roy Hill project with Samsung, i.e. their revenues equal their costs. They are still in negotiation with Samsung to agree how much they can bill.

- Major impairment charges taken on their equipment (total impairment expense of 135mm AUD).

- Covenants breached on their debt, so all debt is current now. However, they may be able to refinance some portion.

- Net debt of 28mm AUD versus 34mm AUD in June 2014

- Dividend cancelled

- One major contract (Middlemount) extended to 2020. Order book of 900 mm AUD, 200mm of that for H2 2015

 

http://www.nrw.com.au/getattachment/b05587dc-468e-4549-95ac-4ca6e6d5df7d/.aspx

http://www.nrw.com.au/getattachment/0d44bcb3-2464-477e-8549-294f857accbd/FY15-Half-Year-Results-Presentation.aspx

 

Tangible book per share of 0.83 versus stock price of 0.21. Of course, the equipment will may worth much less than book value, even though they justwrote it down.

 

This is a siuation with a lot of uncertainty. Will contracts ever come back? Will they be able to survive on lower revenue? How will they settle with Samsung? Will they find an agreement with their creditors? Will they be able to collect their receivables (many of which are owed by coal producers)?

 

On the other hand, the company can be bought for 57mm AUD now, it has historically been profitable, and they distributed 9 cents a share in the last 12 months versus current price of 21 cents. If they survive by any means, they should be worth more. If they don't, you will likely get zero.

Profile looks tempting to me but it looks quite binary aswell...

[frommi]

I am still invested and dollar cost averaged on the way down, but i am not sure if this was a smart idea. They placed a deadline for the resolution with Samsung for this week. After that it should be a bit clearer what the company is worth now. There are still 80 million $ from Samsung in the balance sheet, that are probably at risk.

[frommi]

Trading halt.

https://au.news.yahoo.com/thewest/business/wa/a/27578096/nrw-takes-samsung-to-umpire/

[frommi]

Trading halt.

https://au.news.yahoo.com/thewest/business/wa/a/27578096/nrw-takes-samsung-to-umpire/

 

http://hotcopper.com.au/documentdownload?id=uOMxKKzFkiWRTLKhOROKAxjvTUYC5g2%2Bpm6RqJlJ2%2Fk%3D

 

Still no clarity about the size of this dispute. Looks like we have to wait for the numbers in august to get a better picture.

[frommi]

If they don't, you will likely get zero.

Profile looks tempting to me but it looks quite binary aswell...

 

According to the latest news they got the payments for January and February from Samsung and only March is outstanding. Since this was a 650 Mio AUD contract running ~12 months, the outstanding sum should not exceed ~50-60 Mio AUD and ~90-100 Mio AUD of the receivables should be in cash when they report the next time. Since the dispute is now in a court in Singapore it can take  roughly 6-9 months (So end of the year) until it is solved. The management knew this, so it looks like the company is not at risk anymore.

 

Going into the future, if they can stabilize revenue at 500 million AUD (thats half of current revenue and should easily be achieveable with the Middlemount contract and some small contracts, especially since they are now going after some government sponsored infrastructure projects) and get an NPAT margin of 3.5%, thats 17.5 million AUD in earnings. Slap a multiple of 8-10 on it and you get a fair value of around 150 million AUD. Thats a 3 bagger from here and anything that comes from the Samsung dispute comes on top of that. I know of no cheaper stock that is not massively levered.

[lathinker]

frommi,

 

thanks for your continued coverage of this company/situation.

Having looked at NRW again, tehre is a lot of uncertainty surrounding this company. On the other hand, it feels to me that the risk of this going to zero is relatively muted (sounds like a "famous last words" phrase). I would agree that at current prices the upside outweighs the downside significantly.

[frommi]

They got a 140 million AUD contract from Rio Tinto, at a profit margin of 5% this is roughly 7 million AUD net income for 2 years work from that contract alone.

Not the news i was waiting for, but one further piece in the puzzle.

[frommi]

https://au.news.yahoo.com/thewest/wa/a/29152566/roy-hill-relief-for-samsung/

 

Other disputes with Samsung at Roy Hill were resolved with fair settlements for the contractors. Fingers crossed.

[frommi]

Results were out last week, net debt has ballooned to 100m, but 2 lawsuits against Samsung are still in court in Singapur with an unknown sum. Without that unknown amount of money the equity is pretty much worthless at this point. And since i have no clue how big the upside is i sold out and have to admit that this whole investment was a mistake. Thanks to all that wanted to warn me, but i think i learned a lot here so the money was not totally wasted. At least i can offset some gains this year with the losses and reduce my tax bill.

 

Sorry if somebody followed me into this and lost money.