The big crash in the NRW Holdings Limited (ASX: NWH) share price may soon attract bargain hunters after UBS upgraded the embattled stock to "buy" from "neutral" as it thinks now is a good time to buy into the engineering and construction group.
The NWH share price tumbled 18% since last week to a near three-month low of $2.46 on news that its client Gascoyne Resources Ltd (ASX: GCY) entered into voluntary administration owing NRW around $35 million.
The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) contractor said the financial exposure is through working capital, a second-ranking secured loan for $10 million (which I doubt NRW will ever see again) and equity in the junior explorer of around $4.3 million (which I know it will never see again).
The main problem with investing in the sector
NRW provides drill, blast and mining services to Gascoyne, and it's not the only engineering group to have run into such problems.
The Downer EDI Limited (ASX: DOW) share price also took a beating recently after its partner in the Murra Warra wind farm project, Senvion GmbH, went into voluntary administration as well; while Lendlease Group (ASX: LLC) copped a beating earlier this year after running into problems at a small handful of projects.
That's one of the biggest problems with investing in engineering contractors. They look profitable and growing until a project blows up in their face.
Should you buy the dip?
However, UBS thinks the NRW share price de-rating presents a buying opportunity.
"We have assumed NWH writes off its entire Gascoyne exposure of ~$35m in 2H19E, which we believe represents a worst-case scenario. Subsequently, we have reduced our FY19E EBITDA to $111m (prev. $146m vs guidance pre-Gascoyne impact of $140-145m)," said the broker.
"NWH is one of Gascoyne's largest creditors and we note works are continuing, for which NWH is getting paid, while administrators are exploring all viable options.
"Our focus had already largely shifted to FY20E, where NWH's revenue guidance of ~$1.5b (excl. Gascoyne) results in minimal net changes to our FY20E estimates (UBSe $1.5b revenue, EBIT $110m)."
NWH announced that its order book for FY20 has increased to $1.1 billion as it tried to reassure investors that the Gascoyne fiasco is only a relatively small bump in the road. The amount is around $50 million ahead of UBS's estimates and will offset most of the losses from the explorer.
"We continue to see multiple near-term catalysts from further Iron Ore contract awards from Eliwana, Ironbridge and Koodaideri," said UBS.
"NWH now screens attractively trading on an FY20E EV/EBIT of 8.7x (PE of 13x) with earnings risks into FY20-21E skewed to the upside."
The broker lowered its price target on NRW modestly to $3.05 from $3.10 per share.
