Company Overview: Emeco Holdings Limited (Emeco) provides heavy earthmoving equipment rental solutions to mining companies and contractors. The Company's segments include Australia, Canada and Chile. The Australia segment provides a range of earthmoving equipment and maintenance services to customers in Australia. The Canada segment provides a range of earthmoving equipment and maintenance services to customers primarily in Canada. The Chile segment provides a range of earthmoving equipment and maintenance services to customers in Chile. Its rental fleet includes Caterpillar and Komatsu rear dump trucks of 50 to 240 tons; Komatsu, Hitachi, Liebherr and Caterpillar excavators of 40 to 400 tons; Caterpillar articulated trucks of 30 to 40 tons; Caterpillar dozers of D8 to D11; Caterpillar and Komatsu loaders of 966 to 994H; Caterpillar graders of 14H to 24M, and ancillary equipment, including water carts, service trucks, compactors, integrated tool carriers and tire handlers.


EHL Details

Emeco Holdings has continued to execute on its strategy to become a high quality and a low-cost provider of mining rental equipment solutions with its increased earnings and scale, capabilities and a stronger balance sheet. It maintains to keep its commitment towards safety and perform well through the integration of key acquisitions and continues to focus on achieving zero harm and on development of standardised best practices across all of its operating regions. It enhances its customer value proposition through engineering applications, facilitated by its EOS technology (Emeco Operating System - a fleet management and mining technology platform) and less capital-intensive retail maintenance services from its Force Equipment business.
 

Trend of Revenue and EBITDA over the half years (Source: Company Reports)
 
Strengthened Financial Performance: Emeco’s financial results for 1H18 reflected a significant improvement of 140 per cent in operating EBITDA as compared to 1H17, amounting to $67.0 million; and operating EBITDA margin for 1H18 was 39.2 per cent as compared to 37.9 per cent in 1H17. Operating NPAT was $14.4 million which was positive for the first time since 2H13 which is a significant milestone achieved. 33 per cent of reduction in the total recordable injury frequency rate was reported. Group’s operating revenue was $171.1 million for 1H18, up by $97.5 million as compared to prior corresponding period (pcp), and was driven by improved operating performance and by the six-month contribution from the acquisition of Andy’s Earthmoving Equipment Pty Ltd. In 1H18, it generated operating cash flow of $90.0 million which was up from $16.0 million in 1H17 and was driven by a significant increase in operating EBITDA and because of its normalised position of working capital balance post 30 June 17. As net debt reduced by $50 million and amounted to $407.1 million against 1HY17, pro-forma run rate debt/EBITDA reduced to 2.6x from 3.9x as on 30 June 2017 and the Company seems to be on track to achieve its target leverage of 1.5x by FY20.
 

Financial Performance (Source: Company Reports)
 
Response to Press Speculation: The Group in a response to a media article published regarding a strictly confidential document of the Board, has curbed the speculation of any takeover offer. EHL’s management team constantly considers that the Company’s strategic position is in order so that it can maximise its long-term value for its shareholders and it regularly presents various strategic options to the Board. EHL’s policy is not at all speculative one and it has not solicited, nor has received any proposals regarding the sale of the Company. It expects EBITDA for FY18 will be in line with current analyst forecasts. It has complied with its disclosure requirements and will update the market about its every strategic decision or of any transaction undertaken.

Some significant events that occurred after half year end: The acquisition of Force Equipment provides the Company with a component rebuild capability which allows it to save over 20 per cent of component costs. Post 31 December 2017, it entered in discussions for disposing its Canadian business. In February 2018, it entered into an agreement to transfer Emeco Canada Limited to its local partner, HMER and transfer is expected to be completed in March 2018. Lately an agreement was reached to the noteholders of Emeco’s USD notes so that it can amend the capital expenditure limitation to A$100,000,000 net capex for the 12-month period which commenced from 31 March 17 and for each preceding 12-month period. Any unused limit can be carried forward for the preceding 12-month period.

Successfully completed Retail and Institutional Entitlement Offer: It successfully completed its Retail Entitlement Offer and raised approximately A$13 million for a consideration of A$0.21 per new Share (represented 12.5 per cent discount to the last close price of A$0.24 as on 30 October 17 and 11.0 per cent discount to the TERP of A$0.2359). Approximately 380.8 million of new shares were issued and each new share issued was ranked equally with the existing share on issue. Proceeds of A$80 million were collected and were used for the acquisition of Force and towards the transaction costs associated with the offer and for its working capital requirements. It raised A$67 million from Institutional Offer by issuing approximately 320 million of new shares at A$0.21 per new share and was strongly supported by existing eligible institutional shareholders who took up approximately 66 per cent of their entitlement offer.
 

Return on Assets Trend (Source: Company Reports)
 
Force Acquisition funded through Entitlement Offer: The Group acquired Force Equipment for an enterprise value of A$69.8 million (pre-adjustment for surplus working capital and other customary purchase price adjustments) which was funded through the proceeds of the fully underwritten pro-rata accelerated non-renounceable entitlement offer that amounted to A$80 million. The acquisition of Force Equipment was strategically and financially beneficial to Emeco and was consistent with its objective of becoming the world’s leading provider of maintained equipment rental. Force’s component will rebuild the capability which will mitigate the risk of supply disruption at a critical time in the market. The Acquisition represented a compelling transaction that was consistent with the Company’s existing strategic growth objectives. Key strategic benefits included-

1. 1. Improved scale in earthmoving equipment rental - Acquisition provided full maintenance to rental projects to support Emeco’s strategy to build scale, particularly in Western Australia.
2. 2. Retail Maintenance - It generated low capital-intensive earnings and widened value proposition and customer offering.
3. 3. Increased customer diversification - Emeco’s customer base diversified through additional contract mining, drilling and demand from original equipment manufacturing customers.
4. 4. Enhanced maintenance capabilities - An access to Force’s critical in-house rebuild facilities and expertise helped in mitigating the risk of critical component that is of supply disruption and this support Emeco’s asset management strategy towards becoming the highest quality equipment provider.

 

 
Improved Operational Diversification Post Acquisition (Source: Company Reports) 
 
Outlook for 2018: Significant opportunities for future earnings growth were well placed so that EHL can increase the utilisation and revenue through the remainder of FY18 and then in FY19. The outlook for the remaining FY18 and beyond is positive as improved market conditions have resulted in project wins and has increased the demand for equipment’s. As it’s team has capacity to work harder so there is a significant opportunity that it can increase the operating utilisation for its future earnings growth and expects that utilisation rates and revenue will pick up throughout the second half of the financial year. Management’s focus for FY18 continues to remain maximising the return on capital, building a disciplined cost management approach, reducing the debt and exploring additional strategic consolidation opportunities to grow its business.

Stock Performance: Emeco has been added to S&P/ASX 300 Index and All Ordinaries effective at the open on March 19, 2018, as per the latest March 2018 Quarterly Rebalance of S&P/ASX Indices. Recently, Moody’s Investors Service upgraded Emeco’s corporate family and senior secured debt ratings to “B3” (previously “Caa1”) and upgraded Emeco’s outlook to stable from positive; while Fitch also upgraded the Company’s Long-Term Issuer Default Rating to “B-“.While risks owing to higher maintenance and repair costs of equipment and any cancellation of existing contracts do prevail, the macro trend in mining/ resources sector seems to be favourable and is expected to support group-level efforts. Group’s Return on Capital Invested as on 31 December 17 was (39.2 per cent) whereas it was (32.6 per cent) in prior year, and the change is owing to increase in percentage of Debt in Capital Employed from 97.2 per cent in 2016 to 106 per cent in 2017 while the credit profile is now on an improving trend. In the long-term, refinancing in 2020 is expected to drive future profit with opex and capex synergies from recent acquisitions expected to start delivering now. Meanwhile, with group strategy progressing well, the stock price has climbed up by 75.2 per cent in the past six months and by 17 per cent in the past one month. However, the price slipped by 3.23 per cent on March 16, 2018 with some fading of the takeover news. Looking at the overall picture, we recommend a “Speculative Buy” on the stock at the current market price of $0.30
 

EHL Daily Chart (Source: Thomson Reuters)

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