NRW Holdings ((NWH)) will expand its growth opportunities from civil work in Western Australia following the acquisition of BGC Contracting, which has a high profile in that state, delivering on road and bridge work as well as mining services.
Moreover, the shutdown and maintenance services business is highly complementary to NRW’s maintenance business which has largely had a focus on product. The company may be considered the natural owner of BGC Contracting, given the high degree of overlap between the mining and civil construction businesses but, as Citi notes, this is its largest acquisition to date and integration represents a key risk.
Converting the pipeline of contracts is critical, in the broker’s view, particularly in the BGC Contracting civil business, which has a $300m order book of which $280m is to be delivered in FY20. That, in turn, will be needed to deliver growth in FY21.
NRW will acquire BGC Contracting for an enterprise value of $310m, comprised of $116m in cash and the assumption of $194m in asset finance obligations. The acquisition will be funded by a $120m placement and $10m share purchase plan at $2.85 a share.
Based on consensus estimates the acquisition implies pro forma FY20 accretion to earnings per share of 14% pre synergies and 27% post synergies. Citi forecasts BGC Contracting to deliver $56m in earnings (EBIT) in FY21, including $15m in synergies.
Moelis does not believe the value of NRW is demanding, given the enhanced scale and earnings diversity and maintains a Buy rating with a $3.40 target. Moreover, successful conversion of the $2.0bn worth of tenders in which the company is involved could mean it trades at a premium. The broker increases FY20 estimates for operating earnings (EBITDA) to $228.8m to reflect around seven months contribution from the BGC Contracting acquisition.
UBS points out NRW is operating at mines that have long lives and BGC Contracting adds commodity diversification and further visibility. While the broker has a Buy rating and $3.85 target, a risk discount is retained on the stock, considered necessary because of the lack of detail on specific contracts. The main positives are the incremental growth opportunities in Western Australian infrastructure and more scale in recurring maintenance works.
However, the broker would like further detail on the BGC Contracting depreciation schedule, which appears aggressive relative to NRW, as well as the divisional margins, in order to assess relative operating performance. There is upside potential for synergies from procurement and deeper consolidation.
UBS estimates around US$19bn will be invested across 2018-22 in Western Australian iron ore replacement and sustaining capital projects. In light of NRW’s capability, the chance of winning tenders is skewed to the upside.
Specifically, UBS envisages potential from the award of the Eliwana and Ironbridge projects and assesses $650-700m per annum is obtainable in operating earnings from mining services, with a full-year contribution from the Golding contract and the ramp up of the $420m Baralaba contract.
The BGC Contracting acquisition adds five mining contracts and $1.2bn to the order book. All five of the contracts end by FY22, with Iron Baron having an extension option. Furthermore, the Mount Webber contract expires in FY22 and, Citi notes, will need to be replaced with other work given the estimated mine life of the project is only until 2022.
Citi also points out BGC Contracting recognised a provision of $22m in relation to an east coast infrastructure project in FY19. This is expected to be completed early in the second half of FY20, although further losses are delays cannot be ruled out. The company has also indicated that a BGC Contracting client holds an option to acquire all, or part of, the associated mining fleet used to provide services to that client.
