Poor sentiment clouds NRW's guidance

The relief rally didn’t last long for engineering contractor NRW Holdings (NWH) with the stock giving up most of its morning gains after management reiterated its full year guidance at the group’s annual general meeting.

Expectations are set low with analysts expecting NRW to win only modest new contracts with consensus estimates tipping 2013-14 revenue of $1.06 billion compared to the $1 billion in secured work that the group has on hand.

The stock jumped close to 5% in early trade but drifted into the red for most of the afternoon before closing 0.5 cents higher at $1.24 on Monday.

Investors are not really in a buying mood today with many of NRW’s peers being sold down following the profit warning from Ausdrill (ASL), and Forge Group (FGE) requesting an extension of its trading halt as management tries to work out the earnings damage from two troublesome projects.

While NRW acknowledges the ongoing challenging conditions facing its mining services divisions, management has a “positive outlook over the short- to medium term with a steady pipeline of tenders”.

Its civil engineering division constitutes around 60% of group revenue and its large exposure to infrastructure work in Queensland and Western Australia puts it in a good position to ride out the slowdown in mining work.

The fact that management intends to ramp up hiring to around 3,000 people from current headcount of 2287 is also a positive sign.

Management has given a 2013-14 revenue guidance of up to $1.2 billion, which is at least a 12.7% drop from the previous year.

What’s interesting that there is little good news priced into the stock with analysts forecasting sales to keep tapering off over the next several years.

This means there is plenty of room for NRW to re-rate once sentiment towards the industry turns. We have a favourable view on NRW as investors are compensated to wait for the rebound in confidence given that the stock is sitting on a forecast yield of close to 12% once franking credits are included.

NRW is part of the Uncapped 100.