Emeco Holdings Limited

Company Overview: Emeco Holdings Limited (ASX: EHL) is a provider of mining equipment and generates revenue by selling, renting and maintaining heavy earthmoving equipment to customers in the mining industry in Australia and overseas. The Group operates in three main segments, namely- Rental (provides a wide range of earthmoving equipment solutions to customers), Workshops (provides maintenance and component rebuild services), Pit N Portal (provides mining services solutions and associated services to customers).

EHL Details

Rise in Rental Business & New Contracts to Aid Growth: Emeco Holdings Limited (ASX: EHL) provides mining equipment for rentals, maintenance and project support solutions and services. The market capitalisation of the company as on 08 December 2020, stood at ~$612.06 million. In a recent update, Emeco’s Pit N Portal business has been awarded the mining services contract at Red 5’s Great Western open-cut operations, which has been providing ore for the Darlot Gold Mine.

EHL reported decent financial performance for the year ended 30 June 2020, aided by their large fleet of in-demand assets and the acquisition of mining services business, Pit N Portal. During FY20, the company’s revenues grew 16% to $540.4 million from $464.5 million in FY19. Sales from its major income source, i.e., equipment rentals reported a growth of 7% to $388 million in FY20. EHL reported a decent bottom-line performance with net profit from continuing operations going up by 96% to $66.1 million from $33.7 million, in the same period. It reported an increase in operating expenses, mainly on account of acquisition of Pit N Portal, during the year. Depreciation expenses also increased to $114.01 million in FY20 as compared to $87.41 million in FY19, driven by an increased fleet from recent acquisitions and additional utilisations.

EHL has been reporting improved financial metrics over a five years’ period. Revenues grew at a CAGR of ~34% during FY16-FY20. Operating EBITDA reported a CAGR growth of ~46% during the same period, reflecting the better operating leverage, which the company has been able to achieve with time.

Past Performance (Source: Company Reports)

Improved Segment Performance: During FY20, EHL acquired Pit N Portal, which expanded its business vertical to include hard-rock underground equipment and mining services. Since its acquisition, Pit N Portal had delivered results in line with the expectations. During its four months’ tenure with EHL in FY20, it generated revenues of $35.3 million and operating EBITDA of $9 million at a margin of 25.5%. The rental business continued to see increased traction driven by consumer demand and reported growth in earnings and margins during the year. The company was able to secure several long-term contracts and extensions (3 to 5 years) with clients, which augurs well for EHL and gives future revenue visibility. The other business vertical, Force Workshops saw increased activity, servicing Emeco and Pit N Portal fleet, with growth in retail works too. The segment gave a decent return on capital at 21%, during the year. The Workshops activity (measured by retail and internal revenue) increased from $114.7 million in FY19 to $163.8 million in FY20, reporting an increase of 42.8%, Y-o-Y.

Other Key Metrics: EHL had delivered decent net free cash flow of $71.2 million in FY20, compared to $5 million in FY19. This was mainly because of incurring a cost of $85.1 million in capital expenditure in FY19. However, it reported a better operating EBITDA of $246.1 million, up from $214 million in the same period, owing to higher revenues generated.

FY20 Free Cash Flow (Source: Company Reports)

Acquisition of Pit N Portal: On 28 February 2020, Emeco Holdings Limited announced that it has acquired Pit N Portal company, which provides mining services and solutions. EHL expects to deliver improved financial performance, going forward, and the addition of Pit N Portal helps their cause. This acquisition further increased its revenue from the hard-rock commodity and gives additional revenue visibility to the company. Moreover, the previously announced contract wins of Mincor nickel project and the recent award of the Red 5 Great Western project augurs well for EHL.

Details of Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 54.90% of the total shareholding. Black Diamond Capital Management, L.L.C. is the largest shareholder in the company, with the percentage holding of 24.27%. Paradice Investment Management Pty, Ltd.  holds the second maximum interests in the company at 8.12%

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Decent Earnings Growth & Liquidity Position: ROE of the company improved to 23.8% in FY20 from 19.2% in FY19. There was also an improvement in the current ratio to 1.43x from 1.29x in the same period. Net margin went up to 12.2% in FY20 from 7.2% in FY19. The decent cash flow generation had reduced the net debt of EHL, and it saw a reduction in leverage from 2.0x in FY19 to 1.46x in FY20. There was an increase in the cash cycle to 43.5 days in FY20 from 40.5 days in FY19 but remains lower than the industry average of 116.4 days. Debt to equity of the company stood at 1.74x in FY20, lower than the industry median of 1.83x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Key Investment Risks: The company is exposed to a variety of risks in addition to the impact arising from the disruption due to COVID-19 pandemic. The demand for earth moving equipment is dependent on the long-term commodity prices. It is also exposed to supply chain risks, and hence its ability to deliver its products and services on time. The Group also faces concentration risk and as such should look to diversify their services and geographies in order to mitigate the risk. EHL services around 185 customers across 269 projects. As per a recent update, the company said that its top ten projects represent 37% of the total revenue in 1HFY21, down from 40% in 1HFY20.

Outlook: Despite the COVID-19 headwinds, the company has been quite positive in its long-term prospects. EHL expects demand for its equipment and mining services to be there with gold and iron ore doing well in the western region of Australia. The company is positive on the newly acquired Pit N Portal business, and with the award of the Red 5 Great western project, it hopes to scale up its revenue from this segment. As per the company, the Force workshop business continues to see growth and will continue to provide a strategic advantage that supports Emeco’s low cost, high quality and mid-life asset model. It has now diversified its income streams and expects operating EBITDA to be between ~$115 million - $118 million in 1HFY21. The capex during the same period is expected to be between ~$55 million and $60 million.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company had been giving a decent financial performance, despite the COVID-19 impact on the business environment. It is diversifying its income streams with acquisitions and all the business verticals have good revenue visibility, going forward. As per ASX, the stock of EHL is trading below its average 52-weeks’ levels of $0.457-$2.402, proffering a decent opportunity for the investors to enter the stock. The stock of EHL gave a return of 35.88% in the past three months and a return of 49.03% in the last one month. On a technical analysis front, the stock of EHL has a support level of ~$0.738 and a resistance level of ~$1.286. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in % terms). For the purpose, we have taken peers such as NRW Holdings Ltd (ASX: NWH), and SRG Global Limited (ASX: SRG), to name a few. Considering the current trading levels, decent financial performance, expanding businesses, and revenue visibility, we recommend a ‘Buy’ rating on the stock at the current market price of $1.125 as on 08 December 2020.

EHL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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