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Highlights
- Contractors tied to resources activity are surfacing below modelled fair value.
- Strong forecast earnings growth sits behind the value signal.
- Order books and margins are the levers that will decide the case.
Mining services contractors are turning up on value screens, as the market weighs firm order books against share prices sitting below modelled worth. NRW Holdings (ASX:NWH), a diversified provider of civil, mining and drilling services to resources and infrastructure clients, is among the names trading at a notable discount to a discounted cash flow estimate of fair value. As an ASX 200 participant riding the resources build-out, it captures how the value theme extends beyond producers to the companies that dig, haul and build for them.
Why the contractors screen cheap
The value signal rests on a wide gap between price and a modelled estimate of intrinsic worth, backed by forecasts of brisk earnings growth over the coming years. Services contractors earn revenue from activity rather than commodity prices directly, so a busy pipeline of mining and infrastructure work can drive steady earnings even when the metals themselves swing. That activity-linked model is part of why the discount has emerged: the market may be underpricing the durability of the work in hand, treating the contractors as though they were as exposed to commodity prices as the producers, when in practice they are a step removed and paid for the service they render rather than the price of what is dug up.
Order books are the crux. A contractor's near-term earnings are visible in its awarded and pending work, and a healthy backlog offers a degree of certainty that pure commodity plays lack. When that backlog looks firm while the share price sits below modelled value, a value lens takes notice, because the gap implies the market is discounting work that is already contracted and, in many cases, under way. The quality of that backlog matters as much as its size: long-dated contracts with creditworthy clients, sensible risk-sharing on cost and clear scope all make the earnings more dependable.
A second name broadens the read
The theme runs deeper into the services chain. Lycopodium, an engineering and project-delivery consultancy serving resources and infrastructure clients, has also screened below a discounted cash flow estimate of fair value. Engineering consultancies sit upstream of construction, winning design and study work as projects advance from concept toward a final decision to build, which gives them exposure to the same resources pipeline through a different, capital-light lens. Because they carry little heavy plant and few of the fixed costs that weigh on civil contractors, their earnings can convert to cash efficiently when work is flowing.
Together the two show how the value discount spans the services spectrum, from heavy civil and mining contracting to capital-light engineering. Both lean on the same underlying driver: a full pipeline of resources and infrastructure work translating into earnings the market may not be fully crediting. Yet they sit at different points in the project life cycle, with the consultancy engaged early in design and study phases and the contractor mobilising later when construction and mining get under way, so the pair together read across the whole arc of a project from drawing board to production.
Coverage of ASX Value Stocks has widened to take in the services layer, where activity-linked earnings meet a discount to modelled worth across contractors and consultancies alike. That widening reflects how the resources build-out is drawing attention beyond the producers themselves toward the ecosystem of firms that design, dig, haul and construct on their behalf, where the market's caution has left a number of them screening below modelled value.
How the resources build-out feeds through
The backdrop for both names is a resources sector that continues to commit capital to new projects, expansions and the infrastructure needed to move material to market. Demand for the metals tied to electrification and the energy transition has encouraged operators to sanction fresh developments, and each of those decisions cascades down into study work for the engineers and construction and mining scopes for the contractors. Public infrastructure spending adds a second leg of demand, spreading the work beyond pure resources and smoothing exposure to any single commodity cycle. For the services layer, the appeal is that it converts the producers' capital budgets into contracted revenue, one step removed from the volatility of the commodity price itself. The caveat is that the same budgets can be trimmed quickly if prices fall or financing tightens, so the pipeline is only as durable as the confidence of the clients funding it.
The cyclical caveat
Services earnings are not bulletproof. They ride the capital-spending cycle of their resources clients, so a pullback in project awards or a squeeze on contract margins can erode the very growth the models assume. When commodity prices fall, one of the first responses is often to defer or cancel discretionary projects, and the services firms feel that pause before it shows up in the producers' own results. Execution risk on large projects adds another layer, since fixed-price contracts can turn painful if costs run ahead of expectations or a job hits unforeseen ground conditions. The discount is the attraction, but the cyclicality of the order book, and the ever-present risk of a poorly executed contract, is what a value read must keep in mind.
What decides the case
The signposts are backlog and margin. A growing pipeline of awarded work, delivered on budget at healthy margins, would validate the forecast growth behind the discount and could prompt the market to narrow the gap it currently applies. A slowdown in resources capital spending or margin pressure on fixed-price contracts would test it, and either would likely see the growth forecasts trimmed and the apparent value erode. For a value lens, the gap between price and modelled worth is the draw; the health of the order book is what will ultimately settle the argument. Commentary from the companies on tender activity, contract wins and margin trends will offer the clearest signal of whether the pipeline is firming or fading.
