Emeco Holdings Limited

EHL Details

Emeco Holdings Limited (ASX: EHL) is engaged in the provision of open-cut mining equipment, maintenance and project support solutions and services. The market capitalisation of the company, as on 17 June 2021, stood at ~$522.29 million.

Result Performance (Half-Year Ended 31 December 2020 – 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 million - $118 million. It reported Operating EBIT of $59.7 million during the period, despite the impact of COVID-19 on the business environment and coal weakness.

Key Data (Source: Company Reports)

Outlook:

In the release dated 23^rd April 2021, the company stated that, with regards to rental division, H2 FY 2021 earnings would be broadly in line with H1 FY 2021. EHL stated that Eastern Region performance is consistent with the expectations as well as is showing positive momentum in Q4 FY 2021. This reflects improvements in the customer demand as well as commencement of the new projects.

Overall, it expects operating EBITDA to be between $235 million and $238 million in FY21.

Key Risks:

The Group is exposed to credit risk, liquidity risk and market risk from the use of the financial instruments. Its exposure to credit risk is driven mainly by the individual characteristics of each customer.

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

Technical Overview:

Weekly Chart –

Source: REFINITIV

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 rebounded to 38.2% retracement level of $1.21 from its low of $0.46 but it could not hold on positive momentum and fell beyond 23.6% retracement level of $0.92. For the ongoing week, it has given close at $0.955, displaying positive sentiment on the stock. The technical indicator RSI with a reading around $47 and a flattish curve at the end suggests flattening of bullish momentum.

Going forward, the stock may have resistance around the 38.2% retracement level of $1.20 whereas support could be around the lower Bollinger band of $0.84. 

Stock Recommendation:

The company reported a substantial improvement in the gross margin to 44.4% in H1FY21, from a level of 32.6% in the previous corresponding period. Its current ratio stood at 1.49x during the same period under consideration. There was an improvement in the leverage ratio of the company with a reduction in debt-to-equity to 0.59x in H1FY21, compared to 2.15x in H1FY20.

We have valued the stock using P/E multiple-based illustrative relative valuation and have arrived at a target price that reflects a rise of low double-digit (in % terms). We have assigned a discount to Price/EPS Multiple (NTM) (Peer Average) considering fall in the net margin.

The stock rose by ~10.4% in 9 months. It has made a 52-week low and high of $0.730 and $1.245, respectively.

Considering the aforesaid facts, we give a “Speculative Buy” stance on the stock at the current market price of A$0.955 per share, down by 0.521% on 17^th June 2021.

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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.

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