NRW Holdings: Five things to watch for

Engineering contractor NRW Holdings broke its five-session winning streak with its worst one-day sell off since July last year as attention focuses on its interim results next Thursday.

The stock shed 12 cents, or 8.1 to $1.37 at 3pm AEDT after rallying 11.2% over the past week with pleasant earnings surprises from peers like Monadelphous Group (MND) and WDS (WDS) fuelling support for the embattled sector.

Expectations are set low for mining services firms as the sharp reduction in spending from mining clients are weighing heavily on top-line growth.

In fact, the market is anticipating NRW to post a slide in sales and profit for the six months to end December with consensus tipping around a 35% slump in group revenue to $530.7 million and a 46% decline in adjusted net profit to $26.3 million.

It doesn’t help confidence that analysts forecast vary considerably either at a time when the sector is also throwing up its fair share of profit season sinners, such as LogiCamms and Bradken (BKN). Let’s not forget the big dent left by the collapse of Forge Group (FGE) on confidence towards the sector either.

However, the low expectations for NRW means the risk could be on the upside if management can convince investors that things are not as bad as they might fear.

While the company outlook and profit figures are the obvious things the market will be looking out for, investors will also be heavily focused on its dividend given that the stock is sitting on an expected yield of around 10% including franking credit.

The very high yield reflects the market’s disbelief in NRW’s ability to pay much of a dividend. This is why shareholders should also be closely scrutinising the group’s cash flow, particularly in light of the problems experienced at Forge Group (see Lessons learned from Forge’s flop).

JP Morgan is further advising investors to keep a keen ear out for three other things. The first being its work-in-hand, which stands at around $1.34 billion after the group secured new contract wins with Rio Tinto (RIO), Energy Resources of Australia (ERA) and Roy Hill.

The second is NRW’s tender pipeline given that its peers have mentioned the good amount of new work that still seems to be out there.

The last thing is the growth strategy and NRW’s capital expenditure plans in light of the challenging market conditions.

I highlighted NRW’s potential to outperform back in August last year, and the stock has rallied over 20% since. I continue to hold a favourable medium- to longer-term view on the stock despite the risk of disappointment this month because of management’s good reputation and the strength of its balance sheet.