Thanks for the flattery PeterN23 - you should progress well in life.
I was reasonably happy with the multi-ways approach of that valuation exercise, but not being too interested in it, I did not invest the time taken to get a handle on NWH's potential revenue for 2014 - skimming through announcements was simply too boring. When via thumb sucking I arrived at an EPS of 19.5¢ and assumed zero growth, I had forgotten that some two weeks ago Sjontour had provided a set of EPS and DPS guesstimates from UBS that I rather liked – namely:
Reading material supplied by other companies often fills in the gaps left from reading material from taciturn companies like NWH. MLD is more venturesome when it comes to opining about its future, and the macro backdrop for MLD is substantially similar to that which applies to NWH. NWH is percentage-wise more into civil works than MLD is, which usually is a positive from the profit-margin perspective, but a negative in terms of future revenue visibility. Civil works contracts tend to be short – often months, rather than years. The average tenure of MLD's mining contracts as at 30/06/2013 was 35 months, and 25 months for crushing contracts. MLD provides considerably more detail about its forward contracts than NWH does, which makes guesstimating MLD's future revenue easier, and this visibility improves its SP via better prognosis and a higher P/E ratio that lest risk in the estimates warrants.
MLD is targeting 15% revenue growth on YE 30/06/2013, of which 95% is already contracted, so it should do better. MLD's work in hand as at 30/06/2013 was reported to be $1.7 billion. NWH's was reported to be $1.0 billion. Because NWH's bias is towards civil work, which has a shorter contract period, and NWH has since picked up contracts that will generate a large percentage of their potential revenue in YE 30/06/2014, I would not be surprised to see NWH grow revenue by 15% too, or more. Margin is, however another matter, so EPS cannot be expected to grow in step with revenue. Looking past 2014 is also more difficult to do for NWH than it is for MLD.
MLD's Outlook statements are positive (certainly not gloom and doom), and we can apply much of what one reads for MLD to NWH. Read them yourself, this post is becoming to long for me to duplicate them here.
MLD at $2.54 at COB today looks like good value relative to its forecast future years' EPS and DPS. By my rough calculations it is under valued by perhaps 30%. But by similar rough calculations, NWH is undervalued by about 40%, so I'll stick with NWH, plus NWH has a better dividend yield, so I can more comfortably bide my time holding it.
The problem we have with NWH is that brokers' forecasts are probably too gloomy. The big issue is therefore, what metrics should we use? I am inclined to use the metrics that UBS mooted – namely:
Using the 2014 EPS and DPS as a starting point, 3% yearly growth gets one to 25¢ in 2020. The magic formula that I used starts with a P/E ratio of 7, and adds .65 for every percentage point of growth, and then it adds each percentage point of dividend yield, and at the end a quality factor of between .7 and 1.3 is applied (1 being OK, greater than 1 is good and less than 1 is bad). If I applied this formula it would look like 0.21*(7+3*0.65 +( 0.114 / (0.21*7)*100))*0.9 = $3.157, or if I used a lower quality factor of .8 it would be 0.21*(7+3*0.65 +( 0.114 / (0.21*7)*100))*0.8 = $2.806. These are simply the results of a particular rule-of-thumb methodology applied to guesstimated EPS and DPS metrics, and hence fraught with subjectivity.
The artcane mathematics should not seduce you into believing that NWH shares are worth somewhere between $2.806 and $3.157. Bias is built into the valuations that I have suggested here and in my earlier post, because I have a feeling that NWH shares should be worth more than $2.00, so if a methodology only delivers a valuation of $1.00, I would dismiss it, as I would if it came out with $4. Consequently, I could cut out the mumbo-jumbo and use Piopiou's Law of the Midpoint – that is, pick a low SP like $1, and a high number of equal silliness like $4, add them together and divide by two – voilà, the value of NWH is about $2.50. If that seems too simple to convince you, I could aver that fair value is 0.21*(7+3*0.65 +( 0.114 / (0.21*7)*100))*0.71265 = $2.500.
I asked a water driller in Geraldton if he could tell by vegetation and topography where best to drill for water. He said that although those factors were relevant, he had drilled so often in the district that he knew where to find water, and at what depth. However, to keep his customers happy, and to suggest that he had a rare skill, he went through the process of pretending to use divining rods to locate the spot where he had decided to drill.
NWH Price at posting:
$1.36 Sentiment: Hold Disclosure: Held
(20min delay)