Emeco Holdings Limited

EHL Details

Founded in 1972, Emeco Holdings Limited (ASX: EHL) provides heavy earthmoving equipment and has operations in key mining regions of Australia. The company’s core customers include mining companies and contractors across coal, gold, copper, bauxite and iron ore. The company has ~1,000 machines to rent which is supported by a network of maintenance fleets across the country. The company has a market capitalization of ~AU$516.85 million as on 31^st March 2021.

Result Performance – For the first half ended 31 December 2020 – (H1FY21)

For the first half ended 31 December 2020, the revenue increased by 21.2% to $298.6 million versus $246.5 million in H1FY20 led by the strong commodity mix. Gold contributed 36% towards revenue in H1FY21, followed by metallurgical coal 27%, thermal coal 16%, iron ore 18%, nickel 2%, and others 1% in H1FY21. Further, operating EBITDA fell by 3.5% to $117.9 million versus $122.2 million in H1FY20 leading to a decrease in net profit of tax to $3.3 million versus $27.0 million in H1FY20. Basic earnings per share stood at $0.69 cents in H1FY21 versus $8.64 cents in H1FY20.

Key Data (Source: Company Reports)

Recent Updates

As per the release dated 23 February 2021, the company mentioned that 4,830,918 ordinary shares will be released from voluntary escrow on 2 March 2021, as per the agreement with escrow.

On 11 February 2021, the company announced the change in the substantial holding of Paradice Investment Management Pty. Ltd to 52,602,397 shares, representing 9.669%, from 44,164,956 shares.

On 9 February 2021, the company released the interim financial report for the half year ended 31 December 2020, where it disclosed that the company has not received any government assistance or stimulus in relation to Covid-19 during the period. Operating cash flow before financing cost was reported at $125.5 million in H1FY21.

Outlook:

The company is expecting flat earnings in the rental division in H2FY21, while some growth is expected in FY22.

The Eastern region coal has stabilized in the recent period, while H2FY21 EBITDA margin will be down over H1FY21, but expects growth in FY22 as the idle fleet of large trucks and excavators are placed into new projects.

The Western region will continue its strong growth momentum in H2FY21 leading to better margins in FY22 supported by conversion of single shift projects into double shift projects.

Capital allocation optionality with strong annual cash flows is expected over future years, which retains that the company is at a resilient level in the future periods.

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

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock has been experiencing steady movements with bias is on the downside. The technical indicator RSI with a reading around 42 suggests neutral momentum for the stock.

Going forward, the stock may have resistance around the converging point of 61.8% retracement level and 20 periods SMA of $1.08 whereas support could be around the 23.6% retracement level of $0.85.

Stock Recommendation:

The stock has a 52-week low and high of AU$0.65 and AU$1.29, respectively. The company continues to focus on Capex, which is expected to be at ~$115 million, including asset rebuilds and replacement. Mincor project is expected to attract a Capex at $7 million in H2FY21.

Considering the aforesaid facts, we have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price which reflects a rise of low double-digit (in % terms). We believe the company can trade at a slight premium to EV/Sales Multiple (NTM) (Peer Median) driven by  robust free cash flow as well as disciplined management of capital.

Considering the aforesaid facts, we give a “Buy” recommendation on the stock at the current market price of AU$0.950 per share on 31^st March 2021.

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

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