Those hoping for light at the end of a long dark tunnel for engineering contractors would be disappointed as NRW Holdings Limited (ASX: NWH) became the latest to pour cold water on investors.
Management was hoping that a $330 million contract extension and a 9.5% lift in first half revenue to $570.4 million would distract from the group's debt issues, lack of a dividend payment and a $134.9 million writedown.
It didn't work. The stock slumped 13%, or 4 cents in early trade, to a fresh six-year post-GFC low of 26 cents.
NRW joins sector peers Bradken Limited (ASX: BKN) and UGL Limited (ASX: UGL) in the reporting season doghouse. The Motley Fool has written a number of times about the dangers of bargain hunting in the embattled sector.
The big writedown in asset value may not impinge on NRW's cash position, but it was a major contributor to its $120.6 million loss for the six months to end December last year, compared with a net profit of $22.4 million it delivered in the first half of the previous financial year.
But it's what was hidden in the notes of the accounts that was more alarming, in my opinion. NRW had to get a waiver from its bankers for breaching debt covenants.
The contract extension that was announced today enabled the group to renegotiate the terms of its debt facilities with reduced borrowing limits.
NRW will probably still manage to generate free cash flow from its operations even during these challenging times, but the sudden collapse of Forge Group is never far from our minds.
NRW is also in dispute on one of its Roy Hill project contracts and is facing intense competition, which will continue to depress margins. If the margin squeeze continues, it will make it more difficult for management to stay within its newly renegotiated covenants even though it has an order book of $904 million.
I have little doubt that stocks like NRW will enjoy a rerating at some stage. The mining sector is starting to show early signs of a recovery and government infrastructure spending is expected to pick up over the next few years.
The big question though is who in the sector can last the mile. At this stage, the risk-reward equation continues to favour a recommendation to stand aside.
