Company Overview: Emeco Holdings Limited (ASX: EHL) is engaged in the provision of open-cut mining equipment, maintenance and project support solutions and services. It acquired Pit N Portal in February 2020 and expanded its offerings and services into underground mining equipment, maintenance, technical and provision of engineering solutions. The company operates its business under the three reportable segments – Rental, Workshops and Pit N Portal.
EHL Details
Capital Management Initiatives & Resilient Performance to Drive Shareholder Value: Emeco Holdings Limited (ASX: EHL) sells, rents, and maintains heavy earthmoving equipment to customers. The market capitalisation of the company as on 18 May 2021, stood at ~$484.20 million. As per a recent update, the board has approved the capital management policy under which 25-40% of operating net profit after tax will be allocated to capital management initiatives every year. The policy is supposed to commence following the end of the 2021 financial year and on a pro-rata basis for the second half of FY21.
The company believes that it is well-positioned for future growth with an optimistic outlook, and it will look to maximise shareholders returns in the form of dividends and share buybacks.
During H1FY21, the company delivered a resilient performance with operating revenue at $298.6 million, compared to $246.5 million in H1FY20. The sales growth has been aided by increased revenue from services and contribution from the Pit N Portal business. Operating EBITDA stood at $117.9 million, which was at the upper end of the guidance range of $115 - $118 million. It reported Operating EBIT at a decent $59.7 million during the period, despite the impact of COVID-19 on the business environment and weakness in coal markets. It delivered improved free cash flow performance at $43.9 million in H1FY21, from a level of $23.3 million in the previous corresponding period.
H1FY21 Financial Performance (Source: Company Reports)
Diversification in Portfolio: The company has continued to focus on diversifying its revenue streams through exposure to other commodities. It has witnessed decent growth in metals as part of the commodity mix in H1FY21 and has further reduced its reliance on coal. It has reported gold revenue to triple since H1FY20, as metals revenues got the better of revenue from coal and made a contribution of 57% of the group turnover in H1FY21. In H1FY21, the revenue from thermal coal represented ~16% of the overall contribution, reflecting a decrease from ~40% in H1FY19. As a result, EHL has been able to diversify its customer base and serves 180+ customers over 260 projects as of 6 May 2021.
Shift in Commodity Mix (Source: Company Reports)
Increased Value Proposition Through Service Offerings: The company has witnessed increased traction for its services-related revenue, which includes fully maintained equipment hire and represents ~72% of the total revenue. It has expanded its business to include Force rebuilding the underground equipment in order to provide support and complement the Pit N Portal business vertical. EHL has deployed the in-house built EOS technology to 2 more strategic projects in H1FY21 and further plans to implement this in new projects in 2021. The service model has been embraced by mid-to small-cap miners, which represent ~46% of its total revenue. This segment of customers provides tenure comfort to the company and also meets the demand for its extended services.
Growth in Services-Related Revenue (Source: Company Reports)
Change in Interests in the Company: As per a recent update, the company has reported a change in interest of Black Diamond Capital Management, L.L.C. and its associates in the firm from 132,055,982 shares to 153,015,103 shares.
Top 10 Shareholders: The top 10 shareholders together form around 58.39% 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 28.12% and 9.67%, respectively, as also highlighted in the chart below:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Key Metrics: During H1FY21, the company reported a substantial improvement in the gross margin to 44.4%, from a level of 32.6% in the previous corresponding period. The current ratio stood at 1.49x during the same period under consideration. There was an improvement in the leverage ratios of the company with a reduction in debt-to-equity to 0.59x in H1FY21, compared to 2.15x in H1FY20. It ended the period with a cash position of $71.8 million on the balance sheet as of 31 December 2020, and with a total debt of $299.7 million.
Growth Profile and Leverage Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
Key Risks: The Group is exposed to credit risk, liquidity risk and market risk from the use of its financial instruments. Its exposure to credit risk is driven mainly by the individual characteristics of each customer, and both insured and uninsured debtors are subject to the company’s prudent credit policy. The company is also prone to foreign currency risks given that it has borrowings in United States Dollars (USD). It is also dependent on favourable commodity prices, which may help in driving demand for its products and services among the clients.
Outlook: The company expects the operating EBITDA from the rental division in H2FY21 to be broadly in line with ~$113 million in H1FY21. It has reported that approximately half of the equipment hired in CY2020 has been re-deployed across the business and expects the momentum in rental earnings growth in Q4FY21 to aid in FY22 as well. EHL anticipates the performance to be consistent in the Eastern Region in Q4FY21, driven by the commencement of new projects. It also expects decent growth in earnings in H2FY21 over H1FY21 in the Western Region aided by fleet movement from the Eastern Region. It expects operating EBITDA to be between $235 million and $238 million in FY21.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
Stock Recommendation: The company is focused on growing the Pit N Portal business segment, aided by a capital expenditure of $14 million to acquire a package of quality second-hand underground equipment. The stock of EHL is trading below its average 52-weeks’ levels of $0.730-$1.290. The stock of EHL gave a negative return of ~9.18% in the past six months and a negative return of ~3.78% in the past one month. 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). We believe that the company can trade at a slight discount to its peer average P/E (NTM Trading multiple), considering the expected impact of COVID-19 second wave on its operations and commissioning issues in some early stage works in the Pit N Portal business. For the purpose, we have taken peers such as MACA Ltd (ASX: MLD), Macmahon Holdings Ltd (ASX: MAH), Seven Group Holdings Limited (ASX: SVW), to name a few. Considering the expected upside in valuation and current trading levels, resilient performance in H1FY21, diversifying its commodity mix & revenue streams, reduction in debt levels and positive outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $0.890, as on May 18, 2021.
Technical Overview
EHL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.
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