Hello to all after after hopefully a fine weekend ( although not in Sydney - you were right Parma....nice weather for ducks here!)
And to start the week happily a useful mention for our lively company :
There’s a big story in The Bull today that features NRW along with several other companies.
I have citied in the intro and most of the graphs but if you want the rest the link may work
Cheers
Many investors seek safety with the service providers of the “hot” products or commodities of the moment. In the face of booming commodity prices in iron ore or oil, common sense suggests investing in a company that provides services for multiple miners and oil operators provides a level of diversification that suggests less risk. Conventional wisdom advises to diversify across business sectors to minimise risk. In theory this should be true, but in practice mediocre or poor performing sectors will drag down returns while the admittedly riskier approach of investing in a provider can produce superior returns, if the producing sector remains hot.
Events of the last decade have shown the fatal flaw in that strategy. Regardless of how far the price of the commodity drops, the producers continue to produce while frantically scrambling to cut costs to maintain profit margins. In short, the producers continue to mine and pump but stop expanding and exploring.
Service providers that ignored construction and engineering projects in other business sectors, piling deeper and deeper into mining and oil were crushed when the mining boom declined to saner levels as did the price of oil.
The best managed producing companies found ways to adapt to changing conditions, closing less profitable mines, and virtually abandoning expansion and exploration, eliminating drilling and crushing services, along with a host of related services from processing and engineering to camp construction.
By some measures, the fall of the providers eclipsed that of the producers. Mining investment between 2004 and 2010 exploded from $9.7 billion to $40 billion; and then more than doubled by 2012, rising to $94 billion.
The softening began with a 6.2% drop in Q3 of 2013, dropping $1.47 billion in that single quarter.
The best managed service providers adapted as well, looking for opportunities in infrastructure and other construction activity. Two of the biggest providers on the ASX – Monadelphous Group Holdings (MND) and Worley Parsons (WOR) – saw steep declines, adapted with strategic changes, and have recovered some of their losses over the last decade.
Investors who fled both the miners and their servicers in droves ignored the potential of the best of breed producers and providers to adapt as well as the cyclical nature of commodity pricing.
The following two graphs from the RBA show the depth of the mining capex (capital expenditures) decline and the recent slight rise and potential stabilization.
As mining investment activity slowly improved, the share prices of both WOR and MND improved as well, with WOR rising 200% over the last three years and MND up 136%.
While a return to the extremes of the boom days seems unlikely, UK based global specialist recruiting firm Hays says investments in new resource projects and mining expansion in Western Australia already stand at $1 billion dollars, led by LNG, iron ore, gold, and lithium spending, according to the Western Australia 2018-2019 budget.
At this point in Australia’s history the demand for mineral resources, energy, and infrastructure projects remains intact. To minimise risk, based on analyst expectations, we sorted through multiple ASX mining and construction services providers and identified two with triple digit earnings growth forecasts, and another five with double digit forecasts. Given the scope of the collapse in investment spending, it is not surprising none have positive historical earnings growth over five or ten years. However, the three-year average annual rate of total shareholder return bears mentioning, as does recent price action. Here is the table, listed by two-year earnings growth forecast, highest first.
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Of the remaining prospects in our table, NRW Holdings (NWH)has the best metrics and the most investor interest, up 44% year over year with an impressive track record of shareholder performance. The stock also boasts an analysis consensus recommendation of BUY.
The company operates across Australia and West Africa with three revenue generating operating divisions – Civil, Mining, and Drill and Blast. NRW has turned in solid financial performance over the last three fiscal years, with revenues doubling over the period and profit nearly doubling. Reported revenue for FY 2016 was $288 million, rising to $685 million by FY 2018. Profit increased from $21.4 million to $42.1 million.
The trend continued with the Half Year 2019 results with revenues rising from $345.3 million to $521.1 million and earnings before interest, taxes, depreciation, and amortisation (EBITDA) increasing from $40.3 million to $74.3 million.
The company’s Civil Contractor Division has worked on a diverse project portfolio, from bulk earthworks to airstrips to road and rail work to seawalls to bridges and tunnels to greenfield mine developments and iron ore storage.
The NRW Mining Contractor Services include hiring, road construction and maintenance, construction of tailings storage facilities, and landscaping and rehabilitation.
In 2017 NRW expanded into civil infrastructure and urban development projects with the acquisition of Golding and in 2018 NRW added former rival RCR Tomlinson to its operations. NRW offers drilling and blasting services as well as mining equipment manufacture and maintenance.....
(20min delay)
