good for a punt

In the near future, mainly bad news will emanate from NWH, because its reported profits for 2HY13 will drop significantly relative to the comparable 2HY12 results. EPS will drop, in my opinion, to 13¢ or 14¢, compared to 18.6¢ in 2HY12 – roughly a 25% decline, which approximates the recently reported decline in the employee tally.

The 13¢-to-14¢-EPS expectation was expressed in the 1HY13 investors' report, but the usual comparisons with the 1HY12 previous corresponding period (pcp) outcrowded that message, which was to the effect that FY13 revenue was expected to be between $1,400 million and $1,500 million with an EPS margin of 6%. $1.450 million at 6% divided by 278,900,000 shares is an EPS of 31.19¢, and as 1HY13's EPS was 18.6¢, 2HY13 will be about 13.76¢.

The broking fraternity understands the situation, and the consensus EPS for FY13 is 31¢ – the Thomson Consensus Estimates found in Comsec and other places are:

- - - - 2012 - - 2013 - - 2014 - - 2015
EPS - - 34.7 - - 31.0 - - 29.9 - - 28.6
DPS - - 18.0 - - 16.0 - - 15.6 - - 15.2

The good news is that NWH should be able to hold the FY13 EPS and DPS for another two years and that the current SP of about $2.00 more than accommodates for this flatness. For me the logic of buying NWH at about $2.00 is that the 16¢ DPS is an 8% yield, which with franking credits is 11.43% return, and I can wait a few years in that setting for the situation to improve, and I am of the opinion that NWH can hold the dividend at circa 16¢.

For now, the best rewards for NWH are in civil construction, and ramping up NWH's concrete capability to augment the earthmoving bodes well for NWH. The WA Government's Royalties-for-Regions program is also a positive, because the Government substantially obtains its royalties from iron-ore tonnage extracted from the WA Mid-West and Pilbara regions, and that tonnage is expanding.

If the shallow-witted Mr Market is spooked by the FY13 report when it comes out and it confirms what the cognoscenti already know, it could provide an opportunity for the True Believers to load up, provided they too do not lose faith in the intervening period.

What should help the SP in a fully-priced ASX and with interest rates low is the question “Where else can one park one's funds to advantage?”. If one trawls the ASX for stocks paying a dividend that have an ROE of >20%, a good balance sheet, a P/E ratio of less than 7, a reasonable capitalisation and share-trading liquidity, you will probably end up with NWH, and nothing else. When I did this last week, ignoring capitalisation and liquidity, and mining stocks (because I generally avoid them), I ended up with a short list of two, BYL and NWP – similar businesses, except that BYL has low capitalisation and liquidity. Because I want investments for my SMSF, I preferred NWP. As often happens with me when I decide not to buy a stock, it was BYL that jumped from 40¢ to 46¢ while I was doing my due-diligence work, but such is life.