Nordic (SGX:MR7) – Will Contract Backlog Will Push Nordic Back Up?

Nordic Group Limited (SGX:MR7) is a global solutions provider in areas of System Integration, Maintenance, Repair, Overhaul & Trading, Precision Engineering, Scaffolding, Insulation Services and Petrochemical & Environmental Engineering Services.

In 2020, they are hit by a number of issues relating to Covid-19 such as the extended closures of the Group’s operations in China and Singapore’s circuit breaker where their services to clients were halted. These factors will definitely have a negative effect on their top and bottom line results.

Despite these factors, Nordic has a contract backlog of about S$98mil thanks to newly secured contracts worth S$30mil in 1Q20 and its latest acquisitions are likely to allow Nordic to have earnings growth in the coming years and emerge strong after this pandemic.

A Tepid First Half

The first half of 2020 should not be anything to get excited about. The results of 1H20 have not been released (Nordic changed to half yearly reporting) but according to their AGM, they have completed about $21mil of their orderbook, which is consistent compared to the previous FY.

However, we should not expect a similar story in 2Q20 due to the Covid-19 pandemic. Issues such as extra costs being incurred due to the pandemic should also affect their margins for 1H20.

Even though maintenance should be considered as an essential service, Nordic had faced difficulties with appealing to the authorities to allow their workers who are currently staying in dormitories (where Singapore’s most Covid-19 cases are from) to be able to work. Company has commented that currently, only a small percentage of their workers are given the approval to work at their work sites. As approximately 80% of their revenue comes from Singapore, their business will be negatively impacted during this period.

Contract Backlog

Although the first half of 2020 was not ideal to say the least, that being said, investors should not overlook the contract backlog which increased about S$30mil to S$122mil. The company shared that there is runoffs of about S$21mil in 1Q20 and that leaves us with an outstanding order book of about S$98mil which will contribute to their revenues up to 2022.

The good news here is that Nordic has not received any cancellation of orders as of yet. (Source: https://www.nextinsight.net/story-archive-mainmenu-60/943-2020/13515-nordic-s-agm-q-a-on-covid-impact-etc).

Certain maintenance contracts which are based on unit rates and estimated on historical revenue trends could lead to changes in their order book. This could go both ways as the CEO has stated in the FY19 Annual Report that low crude oil prices could increase the demand for Nordic’s services as refineries could take advantage of this period to extend their maintenance contracts.

Taken from Nordic’s FY19 Annual Report

Continued demand destruction has led to about 65% more refinery shut-ins in Asia for 2Q20 compared to the previous quarter and it could drag on to 3Q if things do not improve.

https://www.spglobal.com/platts/en/market-insights/latest-news/oil/030620-asias-q2-planned-refinery-maintenance-to-shut-65-more-capacity-versus-q1

Possible Catalysts

1) Chemical and Refining Integrated Singapore Project (CRISP)

https://www.straitstimes.com/business/companies-markets/exxonmobil-investment-builds-on-presence-in-spore

CRISP is a multi-year, multi billion project which aims to increase ExxonMobil’s production capacity for higher-value products and cleaner fuels. The project is currently delayed due to the Covid-19 circuit breaker but is expected to resume in June 2020. I am optimistic that Nordic, with their established management and proven track record, will be able to gain a slice of this pie.

2) Economic Recovery in Various Industries

Share prices of Nordic has fallen about 30% from its 2020 highs, this is probably due to the weak crude oil prices and the measures taken worldwide in an attempt to contain the virus.

Nordic has managed to diversified their revenue contribution into various industries. This allows Nordic to be less dependent on the oil and gas industry. As the authorities start to give clearance for their workers to work, as well as the cessation of the circuit breaker, we should be able to see a sustained recovery for both Nordic and Singapore’s economy.

I would also like to add that there will be potential synergy cost savings (eg. using in-house capabilities to supplement Envipure’s business) from their recent acquisitions. This could improve their margins and therefore lead to increased earnings.

Valuation

Nordic is currently trading at EV-EBIT of 8.09. It has a 10 year average of 8.35.

Price to Free Cash Flow has remained fairly stable. They have experienced negative free cash flow only in 2010 and 2019.

While Nordic is not trading near trough valuation levels experienced through 2012-2015, the Company has increased its revenue footprint by over 70% since this period and has demonstrated remarkable stability in gross margins, EBITDA margins, and FCF yields. This is a testament to the nature of the business model and the management team.

Balance Sheet

Nordic finished FY19 with net debt of about S$1.3mil. This is likely to trend higher in the next couple of quarters on a trailing basis, as they will require some time for recovery.

The Company finished FY20 with debt to equity at 0.49. This has been increasing for the past few years in order to finance their acquisitions.

Importantly, the Company has about S$40mil of debt maturing at the end of 2020 and has just enought cash and cash equivalents of about S$43.2mil to cover.

Considering the recurring nature of the business and a strong history of FCF generation, the credit profile of Nordic is not an immediate area for concern but I hope that management could further commit to deleveraging.

Risks

Most of Nordic’s risks stem from the pandemic which has severely impacted the oil and gas industry which they are exposed to. Another issue could be the slowdown of renewing their orderbook due to the poor economic outlook. This would be a blow to the company’s long-term growth as they had relied on a acquisition strategy to grow their business.

Conclusion

Nordic seems undervalued on the account of its contract backlog and that its potential and diversified business is unappreciated for in valuing the company’s long-term growth prospects. Nordic benefits from the stability of its maintenance business segment, a substantial backlog, and contract wins .

There is significant risk associated with playing a rebound in given Nordic’s exposure to the oil & gas industry. As a maintenance service provider, Nordic offers a high level of stability, a track record of FCF generation, and a reasonable balance sheet.

While valuation metrics does not seem “cheap”, the coming months may provide the opportunity to own a high-quality business at a with potential for a rerate due to long term growth. Monitoring the re-opening of the economy and its upcoming financial report will provide valuable insight into determining an entry point.

Cheers

Moss Piglet is currently not vested in Nordic but has plans to initiate a position within the next 3 months.

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