Emeco Holdings Limited

EHL Details

Emeco Holdings Limited (ASX: EHL) is engaged in providing open-cut mining equipment, maintenance, and project support solutions and services. As on 18 August 2021, the market capitalization of EHL stood at ~$701.83 million.

Result Performance (FY21 Ended 30 June 2021)

Good Operating Performance: The company reported strong earnings, cash flows and return on capital despite COVID-19 and falling coal prices, demonstrating the resilience of the business. Its revenue, operating EBITDA and operating NPAT for the period stood at $620 million, $238 million, and $57 million, respectively. Its Return on Capital for the period stood at 16.8%.

Deleveraging Balance Sheet: EHL delivered $87 million in free cash flow (before growth capital expenditure of $40 million), which along with recently completed debt refinancing and capital structure initiatives, helped to further deleverage its balance sheet with leverage ratio reaching 0.93x, as against 1.58x as on 30 June 2020. The Board of Directors declared 1.25 cent fully franked dividend and ~$4 million on-market share buyback, under its capital management package.

Result Summary (Source: Company Reports)

Outlook:

Strong Growth Expected: The company expects growth in all operating segments in FY22, particularly its rental business, initially affected by lower utilization, then stabilized in mid-year and it is building momentum to grow earnings in FY22.

FY22 Guidance: Sustaining capital expenditure in FY22 is expected to be between $140-$150 million, including $25-$30 million allocated for asset replacement, replenishing ~5% of the fleet. The remaining capital is expected to comprise component rebuilds. Growth capital expenditure of $10-$15 million is expected to be allocated to support the new project wins at Pit N Portal.

Key Risks:

The company is exposed to financial risks such as liquidity, credit, and interest rate risk from the using the financial instruments. The company’s business is also impacted by the changes in commodity prices (coal, iron ore, copper, gold), which, in turn, may drive demand for its products and services among the clients.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (illustrative)

Stock Recommendation: 

The stock of EHL posted six months returns of ~+5.51% and one-year returns of ~+27.04%. It has 52-week price range of $0.730 - $1.370. The stock has been valued using Price/Earnings Per Share multiple-based illustrative relative valuation method and arrived at a target price with a correction of low single-digit (in % terms). The company might trade at a slight discount compared to its peers’ median Price/Earnings Per Share (NTM trading multiple), considering its exposure to coal mining operations. For the purpose of valuation, few peers like NRW Holdings Ltd. (ASX: NWH), MACA Ltd. (ASX: MLD), ALS Ltd. (ASX: ALQ) have been considered. EHL has a good pipeline of opportunities, and with a refreshed capital structure, strong cash flow and a healthy balance sheet, it is committed to optimize its operations as it moves through FY22 and beyond. Considering the aforesaid facts, current trading levels, and returns over the past six months and one-year period, we suggest investors to book profit at the current levels. Hence, we give a “Sell” recommendation on the stock at the market price of $1.345 per share, as on 18 August 2021, 10.41 AM (GMT+10), Sydney, Eastern Australia.

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.

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