NWH (ASX) Chart Update

Mention of Downer prompted me to post something that I was thinking about yesterday - that is, how companies often shoot themselves in the foot via the work they win on thin margins.

Postings about contract-win hopes, and then opining that not winning contracts may be a good thing sounds phoney – like missing out on something, and saying one did not want it, anyway. The proverbial silver lining of a dark cloud may help us reconcile the two opposites. Winning contracts is what makes service companies, but winning contracts often destroys them.

Contrat Wins that turned into Lemons

What causes many NWH-like companies strife is the unprofitable contracts that they win. BYL could not survive the problems that it experienced with the Great Eastern Highway Upgrade project and RIO's $300m Stage 2 Western Turner Syncline project (BYL ousted NWH who had won Stage 1). DOW has recently been hurt by a $45 million before-tax loss on its Murra Warra wind farm project in Victoria after its German joint venture partner went into administration. RCR Tomlinson fell from grace following its enthusiastic lurch into solar-energy projects – see https://www.copyright link/companie...olar-splurge-sunk-the-company-20181123-h188zq . I need not dwell on NWH's Roy Hill contract.

Healthy Order Book conducive to Focusing on Margins

If NWH has a healthy order book for FY20 and FY21, then it may be inclined not to blow millions of dollars tendering for work that it was not prepared to win on slim margins. I and posters like Pbawley have posted before that we are very interested in margins, and, hopefully, Management has focused on that, and we may see good margin-related news in the FY20H1 reports due soon.

Consider a scene where a 6% before-tax margin on costs is typical. That implies that for a revenue of $1b, the cost and expenses before tax are $1b/1.06 = $943.396m, and hence the NPBT is $56.604m, or $39.623m NPAT. If one pushes the quoted price up by 1%, then the NPBT is $1.01b - $943.396m = $66.604m, or $46.623 NPAT, which is 17.67% higher. This means that if teams and equipment are reasonably fully employed, then Management could decided to leave these relatively static, and limit new work sought to match the capacity. That situation could probably stand a 1% pricing hike, and not lower the targeted revenue.

If by magic one could reduce costs in equal relative steps to revenue, then revenue could drop by about 15% because of the higher 1% price before one is disadvantaged relative to the original 6% NPBT setting. I know that there are practical limitations that make the foregoing arithmetic unlikely, but in principle, a policy of restrained growth and focus on margins can be more optimal than a grow-grow-grow managerial focus. This is why it is so important for Management to have the traits attributed to Athena (knowledge, wisdom, perspicacity and erudition).