Emeco Holdings Limited

EHL Details

This report is an updated version of the report published on 20 April 2022 at 3:55 PM GMT.

Share Redemption Update: Emeco Holdings Limited (ASX: EHL) provides maintenance, project support solutions and services, and open cut and underground mining equipment. On 20 April 2022, EHL announced that it had redeemed ~645,000 shares the previous day in an on-market buyback. It proposes buying a maximum of ~54.06 million shares under the ongoing redemption program dated 24-Feb-2022 to 23-Feb-2023. 

Financial Performance of 1HFY22 (ended 31 December 2021):

• Operating EBITDA increased from ~$118 million in 1HFY21 to ~$122 million in 1HFY22 (up ~3% Y-o-Y) and was delivered within the guidance range of ~$120 - $125 million.
• EHL posted revenue growth across its operating segments, led by the Pit N Portal segment and new project contracts.

Pit N Portal Segment Overview; Highlights (Analysis by Kalkine Group)

Key Risks:

The company faces the risk of changes in commodity prices, low equipment utilisation, weather impacts, and the COVID-19 led labour shortages.  

Outlook:

• EHL expects margin expansion as the Pit N Portal business projects shift towards the production phase. It estimates a modest rise in margins and earnings in 2HFY22 and a considerable growth in FY23.
• EHL plans to monetise avenues in the Eastern Region and maintain a balanced commodity portfolio. It intends to manage labour scarcity in the Western region and improve margins.
• Operating EBITDA guidance stands at ~$250 - $260 million for FY22.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: 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: The stock of EHL gave a negative return of ~10.82% in the past three months and a negative return of ~24.78% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.800 - $1.370. The stock has been valued using the P/E multiple-based-illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ average P/E multiple, considering a tight labour market (Western Region), weather impact (Eastern Region), impact on equipment utilisation, and margins. For valuation, a few peers like Acrow Formwork and Construction Services Ltd (ASX: ACF), Stealth Global Holdings Ltd (ASX: SGI), Seven Group Holdings Ltd (ASX: SVW), and others have been considered. Considering the low trading levels, growth in revenue, operating EBITDA, and positive NPAT in 1HFY22, an indicative upside in valuation, higher operating EBITDA guidance for FY22, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.845, as of 20 April 2022, 10:50 AM (GMT+10), Sydney, Eastern Australia.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

EHL Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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