Emeco Holdings Limited

Company Overview: Emeco Holdings Limited (ASX: EHL) is engaged in selling, renting, and maintaining heavy earthmoving equipment to customers in the mining industry in Australia and overseas. The company provides EOS, equipment productivity and management tool, for both Emeco and customer-owned fleet and generates earnings from the provision of equipment rental and maintenance solutions to the earthmoving industry. The group supplies safe, reliable, and maintained equipment rental solutions to its customers and offers repair and maintenance and component and machine rebuild services for its customers’ equipment.

EHL Details

Strong Earnings and Returns in FY20: Emeco Holdings Limited (ASX: EHL) is engaged in the selling, renting, and maintaining heavy earthmoving equipment to customers in the mining industry in Australia and overseas. As on 20 October 2020, the market capitalization of the company stood at ~$432.52 million. The company possesses a broader customer value proposition, more balanced commodity mix and a more diverse customer base. It is focusing on managing costs and is judiciously allocating capital to generate higher returns and strong free cash flows.

During FY20, the company reported an increased cash balance to $198.2 million, primarily because of the conversion of EBITDA to net operating free cash flow. Increased earnings and decent generation of cash flows in FY20 resulted in a reduction in the net debt with a fall in leverage ratio to 1.46x from 2.0x in FY19. The company is focused on a stronger and more resilient balance sheet, which will provide more flexibility to capital deployment.

Decrease in Leverage (Source: Company Reports)

During FY20, the company also reported an increase in operating revenue from continuing operations to $540.4 million up from $464.5 million in FY19 and saw improved profitability with operating EBITDA of $246.1 million, reflecting an increase of 15% on FY19. This was mainly due to enhanced utilization of the rental fleet and increases in rental rates on new and renewed contracts. The company has recently completed its retail entitlement offer, wherein it raised $38 million at a price of $0.85 per share, along with $111 million from the institutional component of the entitlement offer. The company has also refinanced its US$180 million notes with the extension in maturity from March 2022 to March 2024. Post the completion, the pro-forma net debt of the company will be $224 million along with net leverage ratio of 0.9x.

EHL is executing its strategic objective of diversifying its commodity exposure. It aims to be the lowest cost, highest quality provider of mining equipment and is focused on continued diversifying commodity exposure. The company is judiciously allocating capital to generate healthy returns and drive solid free cash flow. EHL is likely to witness another growth year in FY21, with focus on new longer tenure, fully maintained contracts, which provides additional commodity diversification.

FY20 Financial Highlights (Source: Company Reports)

Emeco Secures Red 5s Great Western Open Cut Mining Contract: The company has recently been awarded the open pit mining contract for Red 5 Limited’s Great Western Project. This will transition operations and grows its production and will widen the value proposition of Pit N Portal. It will also help in progressing the strategic path for EHL to expand its services and diversify its commodity mix. The company has also received a notice to start its five-year contract with Mincor Resources NL. This contract is likely to expand the service offering of EHL and will support its strategic objective of securing long-tenured projects.

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Emeco Holdings Limited. Black Diamond Capital Management, L.L.C. is the largest shareholder in the company, with a percentage holding of 24.27%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: During FY20, current ratio of the company stood at 1.43x, up from 1.29x. This shows that the company retains a decent liquidity position and can pay its current liabilities using its current assets. During FY20, Debt/Equity Ratio of the company was 1.74x, and Assets/Equity Ratio of the company stood at 3.05x, lower than the previous year ratio of 3.88x and 2.36x, respectively. This indicates that the business is financed with a larger proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.

During FY20, gross margin of the company stood at 25.1%. In the same time span, EBITDA margin of the company was 44.5%, higher than the industry median of 30.2%, indicating higher profitability. During the year, net margin of the company witnessed an improvement over the previous year and stood at 12.2%, up from 7.2% in FY19. This indicates that the company is well managing its costs and can convert its revenue into profits. In the same time span, Return on Equity of the company was 23.8%, as compared to the industry median of 9.0%. This suggests that the company is well managing the capital of its shareholders and can generate profits internally.

Key Margins (Source: Refinitiv, Thomson Reuters)

Key Risks: The onset of COVID-19 has impacted the earnings in 2H20 because of some additional costs and the fall in coal price, resulting in a reduction in utilization in the Eastern Region. The group is also exposed to supply chain risks, the likelihood of disruption to the operations, fluctuation in long term commodity prices, reduced demand for earthmoving equipment, credit risk, liquidity risk, and market risk. 

Future Expectations and Growth Opportunities: EHL seems well placed to service market demand and is confident in its ability to redeploy fleet into new projects. The price decline in coal may limit short term growth, but the group expects strong bidding activity across all Rental regions and in Pit N Portal. EHL expects growth in FY22 because of the strong momentum in the Western Region, and the further project wins in Pit N Portal and Eastern Region. The company is the widening the value proposition with an increased focus on improving quality, cost effectiveness and efficiency through continuous improvement projects and technology based systems and processes. The company may see strong demand in gold and iron ore, which will support its growth in earnings and margins in the Western Region.

Key Valuation Metrics (Source: Thomson Reuters)

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

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

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

Stock Recommendation: Despite the increased outspread of COVID-19 and the subsequent restrictions, EHL witnessed an increase in its earnings because of the large fleet of in-demand assets and the acquisition of Pit N Portal. The company emerged as a more resilient and sustainable business with a stronger customer value proposition, stable commodity mix and a more diverse customer base. The stock of EHL gave a negative return of 13.98%% in the past three months and a negative return of 8.89% in the last one month. As per ASX, the stock of EHL is inclined towards its 52-week’s low level of $0.457, proffering a decent opportunity for the investors to enter the market. On a technical front, the stock of EHL has a support level of ~$0.65 and a resistance level of ~$1.068. We have valued the stock using EV/Sales multiple based illustrative relative valuation approach and have arrived at a target price of lower double-digit upside (in percentage terms). Considering the attractive trading levels, positive outlook in the long-term and decent financial performance, we recommend a ‘Buy’ rating on the stock at the current market price of $0.770, down by 3.145% on 20 October 2020. 

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

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