Company Overview: Emeco Holdings Limited (ASX: EHL) is engaged in providing open-cut mining equipment, maintenance and project support solutions and services to its clients. The Group reports its revenues under the following business divisions: Rental – provides earthmoving equipment solutions to customers in Australia; Workshops – provides maintenance and component rebuild services to clients; Pit N Portal – provides mining solutions and services to customers.
EHL Details
Diversified Income Streams & Project Wins to Aid Earnings: Emeco Holdings Limited (ASX: EHL) is involved in selling, renting and maintaining heavy earthmoving equipment to customers. The market capitalisation of the company as on 16 February 2021, stood at ~$603.90 million. The company’s Pit N Portal business has been awarded the mining services contract at Red 5 Limited’s Great Western open-cut operations, as per an announcement on 15 October 2020. The win further strengthens EHL's FY21 pipeline and also diversifies its service offering and enhances exposure to gold mining space. The project is expected to drive synergies with Pit N Portal utilising the existing equipment in the Emeco fleet and will also leverage Pit N Portal’s mining expertise.
EHL expects a decent performance from the Pit N Portal business in FY21 and further as there will be a ramp-up in project activities. The company is anticipating high levels of mining services tendering, for both underground rental and mining services, as well as surface projects.
During FY20, the company has delivered a resilient financial performance with an increase of ~16% in revenue to $540.42 million in FY20, from $464.48 million in FY19. Rental income which contributes a major part of the total sales grew by ~7% to $387.95 million in FY20, from $363.25 million in FY19. There was further revenue comfort during the year with contribution from the Pit N Portal business. The operating EBITDA went up by ~15% to $246.1 million during the year. Operating NPAT grew by ~39% to $87.5 million. EHL reported improved cash flow performance in FY20 with free cash flow at $71.2 million during the period, resulting in the reduction of net leverage to 1.46x as on 30 June 2020.
FY20 Operating Financial Performance (Source: Company Reports)
H1FY21 Performance Update: EHL reported continued growth in revenue to ~$299 million during 1HFY21, with an increase of ~21% on the previous corresponding period. There was a drop of 4% in the operating EBITDA to $118 million, owing to the COVID-19 disruption and weakness in the demand for coal. The free cash flow (before growth capex) stood at $44 million, up by 75% on the pcp. The company expects a further benefit in cash flows from interest savings from H2FY21 onwards, following the repayment of $195 million of US notes during H1FY21. There was an improvement in the leverage (Net debt/Operating EBITDA) of EHL to 0.96x as on 30 December 2020, compared to 1.6x on 30 June 2020, which is in line with the company’s long-term objective.
H1FY21 Financial Performance (Source: Company Reports)
Resilient Rental Earnings during H1FY21: The Group has reported decent rental earnings in the H1FY21 period, despite the COVID-19 induced volatility and weakness in coal markets in the Eastern Region. Operating EBITDA stood at $113 million in H1FY21, compared to $131.3 million in H1FY20. However, there was a growth of 36% on the operating EBITDA in the Western Region, when compared to the previous corresponding period. There was gross utilisation of 85% and operating utilisation of 59% during the given period, reflecting capacity in the fleet to further enhance the rental earnings.
Top 10 Shareholders: The top 10 shareholders together form around 54.55% of the total shareholding while the top 4 constitute the maximum holding. Black Diamond Capital Management, L.L.C. and Paradice Investment Management Pty. Ltd. are holding a maximum stake in the company at 24.27% and 9.67%, respectively, as also highlighted in the chart below:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Key Metrics: EHL delivered improved margin performance in H1FY21 with gross margins at 44.4%. EBITDA margin stood at 37.6% during the period. The company has witnessed a growing revenue trend over the years owing to its enhanced performance and diversification of the business. There was an improvement in the debt to equity ratio of the company to 0.59x in H1FY21, compared to 2.15x in H1FY20. There was $169 million of liquidity available for the company as on 31 December 2020 with $44 million of free cash flow generated in H1FY21.
Growth and Profitability Profile (Source: Refinitiv, Thomson Reuters,Analysis by Kalkine Group)
Key Risks: EHL is exposed to credit risk, liquidity risk and market risk from the use of its financial instruments. The credit risk is mainly influenced by the individual characteristics of each customer, and as such the management considers a prudent approach to ensure that all the debtors are subject to the Group’s credit policy. The company strives to maintain a decent liquidity level to meet its liabilities under normal and stressed conditions. The Group is also exposed to currency risks; given that it holds borrowings in USD. As such it has entered into cross-currency interest rate swaps to mitigate the risk.
Outlook: The company has delivered decent financial performance despite the volatility in the economic environment due to the outbreak of COVID-19 pandemic. It expects earnings from the rental division to be flat in H2FY21, with anticipated growth in FY22. The earnings from the Eastern Region have stabilised, with a positive trajectory in margins as projects commence in Q4FY21. EHL also expects enhanced growth in FY22 with the utilisation of the large fleet of idle trucks and excavators, as they are placed into new projects. It is expecting strong growth from the Western Region in H2FY21. EBITDA margins from the rental business are expected to normalise between 55%-60% in the long term.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: EHL has maintained a decent balance sheet with a reduction in debt levels. It expects to continue to generate strong cash flows in the future aiding strategic investment opportunities and maximising shareholder's value. As per ASX, the stock of EHL is trading below its average 52-weeks’ levels of $0.457-$2.402. The stock of EHL gave a positive return of ~18.36% in the past three months and a positive return of ~1.75% in the past one week. On a technical analysis front, the stock of EHL has a support level of ~$0.731 and a resistance level of ~$1.299. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers such as MACA Limited (ASX: MLD), Macmahon Holdings Limited (ASX:MAH), SRG Global Limited (ASX:SRG), to name a few. We believe the company can trade at a slight premium to its peer average P/E (NTM Trading multiple), considering its decent financial performance and diversified revenue segments. Considering the current trading levels, expected upside in valuation, resilient financial performance, positive rental revenue outlook and enhanced synergy from the Pit N Portal business, we recommend a ‘Buy’ rating on the stock at the current market price of $1.16, up by 4.504% as on 16 February, 2021.
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EHL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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