Shareholders of NRW Holdings Limited (ASX: NWH) are riding high as the engineering and construction group climbed on the tailwinds of the mining revival.
The NWH share price surged 128% over the past year to a near seven-year high of $2.94 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index gained less than 8%.
NRW Holdings is one of the best performing stocks that's exposed to the mining and civil construction industry. It's peers like the Downer EDI Limited (ASX: DOW) share price is up 10.5% while Lendlease Group (ASX: LLC) has slumped by nearly a quarter due to problems with a small handful of construction projects.
Big profit growth
That's the issue with construction engineering firms. Costs blowouts on projects are not uncommon and many are unable to clawback unexpected costs from clients.
But NRW Holdings seems to be managing its projects well. Revenue in the first half of FY18 surged 52.3% to $522.6 million as earnings before interest and tax (EBIT) more than doubled to $50 million.
The group benefited from the collapse of RCR Tomlinson as it snapped up its Mining Technologies business for $10 million and NRW is hunting for more targets as it wants to better diversify its income stream.
That's probably a good idea given the cyclical nature of the mining industry and this would be an opportune time to increase its exposure to infrastructure construction given the billions that state and federal governments are pouring into such projects.
There have been recent rumours that NRW is running the ruler over Western Australia based BGC Contracting although NRW was issued a statement implying that the $400 million to $600 million price tag touted for BGC might be too much for it to swallow.
I think it's good that NRW is maintaining balance sheet discipline given that it doesn't seem to need to make big acquisitions to drive growth as it reported a project pipeline worth around $6 billion and had $83 million in cash at the end of 1HFY19.
Is the stock cheap?
Having said that, the stock is starting to look fully valued as it's trading on a FY20 consensus price-earnings multiple of over 15 times.
I think the outlook for the sector is good but I see more upside from Seven Group Holdings Ltd (ASX: SVW) and Downer.
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