NRW’s dividend sin

NRW's interim results have missed the mark, but that's not the primary reason behind the stock's fall from grace today.

It wasn’t so much to do with the profit numbers that sent engineering contractor NRW Holdings (NWH) tumbling to a near four week low today. It was dividends, or rather the lack of it.

Management must have been well aware of the dividend obsession that is gripping the market and any disappointment on that front would be dealt with harshly. It doesn’t matter that earnings are actually holding up better than most sceptics have feared.

Sure, half year revenues have crashed 35.7% to $520.9 million and net profit was slashed by 53.9% to $22.4 million, which is lower than what consensus forecast was expecting, but the miss is unlikely to trigger significant downgrades in earnings among brokers for 2013-14.

The bigger driver for NRW’s worst one-day sell-off since July last year of 9.1% to $1.30 is the halving of its dividend to 4 cents a share.

The cut in dividend was expected, but shareholders will be disappointed that it had to be lowered by that much. The market had been hoping for a full year dividend of 9.8 cents. NRW does have a history of paying a bigger final dividend (excluding last year as the pipeline of work dried up), but I don’t think management will meet expectations. Shareholders may have to settle for around 9 cents a share in distributions instead.

That’s still not too shabby as this would put the stock on a 9.9% yield once franking credits are included.

Further, the outlook commentary implies that the worst of the slowdown is over. NRW’s order book has increased by $300 million to $1.3 billion, and management said it has a $3.3 billion tender pipeline.

NRW also reiterated its full year revenue guidance of $1 billion to $1.2 billion, although brokers may still lower their net profit projections due to ongoing margin pressure that the industry is facing.

More significantly, NRW’s outlook is consistent with what investors have been hearing from other engineering contractors – that the second half is shaping up to be an improvement over the six months to end December last year.

The fact that the sector appears to be finally singing from the same upbeat song sheet will go a long way in lifting confidence as these companies have been giving very mixed or negative signals over the past few reporting seasons.

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