The share price performance of NRW Holdings Limited (ASX: NWH) makes the mining services contractor one of the best-performing stocks on our market but the rally is far from over if UBS is to be believed.
The stock has already notched up a 150% gain over the past 12 months as the mining sector came roaring back on higher commodity prices. In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) has risen 10% over the same period.
But if you thought this was about as good as it got for NRW Holdings, think again! UBS believes there's another circa 20% upside to the stock.
I also believe there is a further re-rating opportunity for NRW in the current financial year, but I'll get into that later.
Management had issued a positive FY19 trading update last month with revenue tipped to rise more than 40% over the previous financial year to over $1.1 billion and the company is well placed to win more work, including a contract for BHP Billiton Limited's (ASX: BHP) South Flank iron ore project and Rio Tinto Limited's (ASX: RIO) Koodaideri project and Fortescue Metals Group Limited's (ASX: FMG) Eliwana project.
"Recent contract announcements and industry feedback have led us to upgrade FY18-20E Mining division revenue by 5%, 17% and 10% respectively," said UBS.
"However, we have moderated EBIT margin assumptions (~9% in FY19E from ~10% in FY18E and peak margins of ~22%) due to lower use of NWH equipment (materially lower margin but lower risk/capex) on major revenue contracts in FY19E, as well as caution around higher rental equipment and labour costs."
While many of the iron ore contract wins are arguably reflected in NRW's share price, the broker believes there is significant upside from higher win-rates on tenders.
Another re-rating opportunity is also likely to present itself, in my opinion, as management resumes paying a dividend this financial year – its first since 2014.
Stocks that start (or re-start) paying a sustainable and rising dividend typically outperform the market and NRW Holdings is likely to find itself in this category as it starts to gain the attention of income-seeking investors.
It isn't only NRW Holdings that is well placed to outperform. Other engineering groups that cater to the resources sector are also in a sweet spot. This includes Worleyparsons Limited (ASX: WOR) and Emeco Holdings Limited (ASX: EHL).
Outside of the engineering sector, there's another outperforming stock that is also expected to keep rallying ahead in FY19, according to the experts at the Motley Fool.
Click on the free link below to find out what this stock is and why it should be on your radar this financial year.
