NRW Holdings: Ready to ride mining booms and busts
Mining services companies can be risky ventures. Over the last few years some have met an untimely demise.
RCR Tomlinson's 100-year history came to a sorry end last year. Others that no longer grace the ASX include Titan Energy Services and Forge Group. One that flirted with disaster in 2015, but has since gone from strength to strength is NRW Holdings (ASX:NWH).
In 2015, NRW recorded a loss of $230 million. This was due to a major slowdown across the resources sector along with one particularly ill-fated project. Samsung C&T had sub-contracted NRW to work on the Roy Hill Rail project - part of Gina Reinhart's Roy Hill iron ore project in the Pilbara, WA.
This was Samsung C&T's first mining construction project and they ended up losing about $1 billion on it. Many of the sub-contractors also suffered large losses, including NRW who booked an impairment charge of $157 million. By February 2016, the share price had fallen as low as five cents, with the market capitalisation having plummeted from more than $1 billion four years prior to about $14 million.
Those who had great foresight and a strong stomach in early 2016 would now be sitting on gains of about 50 times.
The company rebounded to profitability in 2016 and those profits have grown every year since. In 2020, profits are forecast to reach about $80 million more than five times their entire market capitalisation four years prior.
NWR have now expanded from focusing purely on mining services to also include infrastructure and urban construction in their portfolio. The nature of most of their revenue is project based.
The risk with projects is that they are usually costed on fairly tight margins. NRW generally operates on single digit margins. As many projects run for multiple years a lot of unforeseen things can occur. It does not take a lot for costs to blow out and for the project to suddenly be operating at a loss.
These risks were highlighted again in 2019, as they had to write-off costs on the Gascoyne Gold project when Gascoyne Resources went into administration. This resulted in their earnings before interest and tax (EBIT) being reduced by about one third.
With that introduction you would have to wonder why anyone would contemplate investing in a mining services company?
There is an old adage that the people who make the most money from mining are the ones selling the picks and shovels rather than the miners themselves. Whilst mining is a cyclical business, subject to the market driven pricing of commodities, for as long as the global economy consumes mineral resources there will always be demand for companies that supply products and services to the miners.
Looking specifically at NRW, they have been around since 1994 and listed since 2007. Throughout that time they have ridden booms and busts and have managed to grow revenue from $278 million in 2007 to $1.126 billion in 2019.
Over the last four years they have generated a cumulative $270 million in operating cash flow. $226 million has been reinvested in the business, including two material acquisitions of other businesses. About $15 million was paid out as a dividend in 2019, leaving a further $25 million to add to the bank balance.
Having a strong balance sheet allowed them to capitalise on an opportunity when RCR Tomlinson went under. They purchased the RCR Mining Technologies business for $10 million from the liquidators who were looking to sell off the assets. In the 2019 accounts this acquisition was valued up by $5.1 million as the fair value of the assets exceeded what NRW had paid. After floundering a bit during the uncertainty of the administration period, the business is now back on track and recently picked up a significant contract with Fortescue Metals Group.
From a valuation perspective NRW does not look expensive. It is trading on a forward PE ratio of 11.3. As mentioned above, revenue has quadrupled in the last 12 years, but the share price is at about the same level. NRW is now a much larger business with a more diversified revenue base. They have positioned the business to reap rewards during the boom times and shored up the defences to ride through the troughs.