Originally posted by Pioupiou
The acquisition of RCC for $10m is itself not a sufficient factor to effect things like NPAT, EPS, DPS, et cetera. Its value in an FA-style valuation falls into the realm of subjectivity from which an increased PER can emerge, or similar ratios like EBIT margin . This is more augury than commercial arithmetic. The acquisitions immediate-term effect is actually negative due the acquisition expenses and less cash to fund an increased near-term dividend increase. Any actual contribution to NPAT in FY 2020 and FY2021 would be a few million dollars, so if it were a generous $3 million a year, that that would hardly account for 1c of EPS.
However, it and other expected positive announcements, are going to uplift the mood of Mr Market, and a PER of say 14, is reasonably sustainable. From a trader's perspective, the PER could be higher at times, and this would effect the charts on which chartists focus.
Now we get to the scary bit. If the $45m NPAT for H1FY19 is extrapolated to FY19 on the basis of a revenue of $1.1b, then we are looking at $99m NPAT. Using $100m NPAT and a 400m share count for convenience, we get an EPS of 25c. A per of 14 would give a target share price of $3.50. This seems too good to be true, so all the quick-buck types will want to take profits off the table, so I am stuffed if I know where the SP is actually going to be. One of my fairly reliable gut-feel arithmetics is to pick the mid-point of a range of values, so using my long-held $2.30 and $3.50 as the range, one gets $5.80/2 = $2.90. This is within the 10% margin of error that allows for SPs circa $2.68, so it is not a heady number.
The reason why I stick with $2.30 is that I do not want to excite the horses, and I subscribe to the view that good enough is good enough. I am not in a position to buy more NWH shares, and I do not intend selling if I strongly believe that $2.30, or better, is likely to be seen soon, and so $2.30 suffices for me to continue to hold my shares, and sleep well at night. Also, to me it makes little difference if the SP hits $2.30 now, or later, or hits $3.50 this calendar year, or two years later.
Because funeral shrouds do not have pockets, my views on owning more or less capital is a smaller issue for me than it is for a younger investor. Further, for reasons that I cannot explain, my lifestyle and tastes are so simple, that I could live just as well on the old-age pension if my situation were I reduced to be able to get it. Drinking a bottle of wine that costs much more than $10 would hasten my need for that shroud, because I may well choke to death at the thought of the price of the wine.
The views and the reasons of other NWH shareholders would allow us to raise the level confidence of a new range of reasonably possible target prices.
Well said.
I'm also interested in how the RCR divisions will behave when transplanted into NRW:
- What liabilities come with these new divisions?
- How much bidding is in the pipeline waiting for contracts to drop (probably some of the the same projects as NRW have been bidding on for different work - NRW might get a revenue boost almost immediately for 2020H1)?
- What is in the RCR Mining division when you take away RCR Mining Technology and what are their plans for it (minor point that is sort of glossed over in the announcements or maybe I'm missing something)?
- The FY2018 margins for the RCR Resources division was poor (approx $2m EBIT on $300m rev) but NRW says the 2 key parts generated $110m rev in the same year and will be eps accretive on $10m cost - how will this all actually play out in FY2020? (I'll ignore the 2019 numbers as you say, the one offs (maybe including redundancies) will likely make it look bad.
- How much work was generated historically by the RCR divisions that NRW does not have?
- How will NRW generate new work for these divisions? (maybe perfect timing, maybe will take time to calibrate)
second level:
- Was the focus on solar reducing the amount of capital being spent in these divisions? (may need more capital, like Hughes)
- Was the focus on solar reducing the amount of attention, strategic effort being spent in these divisions? (may improve performance with relatively low effort now they are strategic to NRW)
Most of this will take time to gauge - probably not until late calendar 2019 will we get some visibility. FWIW, my approach is to consider how they have gone with Hughes Drilling and Goldings and take NRW at its word based on that performance.
For me the next step is to go back and look at the projects they've worked on over the past few years and get a better feel for what they do. Also to see if the RCR reports going back give or hint at margins and revenue volatility.
All up, I'm very happy at first blush. I almost posted a "what if NRW bought some of RCR's engineering capabilities?" post a month ago when they said there were buyers lining up, but I thought the lot would get snapped up by someone larger tbh.
Cheers,
pb
(20min delay)
