Why is Emeco Holdings trading in green on the ASX?

Emeco Holdings Limited (ASX: EHL) operative in all key mining regions of Australia, with its heavy earthmoving equipment is currently trading in green on the Australian Securities Exchange, as on 15 November 2019, with its stock trading up by 3.171% at $2.115 (at AEST 1:06 PM). The surge is primarily driven by the half-year guidance provided at the Annual General Meeting (AGM) address held on 14 November 2019 and the expectation of further earnings growth in the second half.

Let us understand the company’s present stance and guidance, and screen through the stock performance:

FY19 For Emeco Holdings

The company’s strategy for FY19 was to increase fleet utilisation and rates and simultaneously manage costs to improve margins. Heavy focus was laid on asset management and expansion of the asset maintenance capabilities, to consequently maximise the return on capital, generate strong cash flows and to continue to aggressively deleverage the business.

Mr Ian Testrow, Managing Director & Chief Executive Officer of EHL stated at the AGM that the company achieved strong growth in FY19:

  • Operating NPAT was up 214% on FY18 to $63 million;
  • Operating EBIT was $125 million; up by 51% on FY18;
  • EBITDA of $214 million, up by 40% on FY18;
  • Operating EBITDA margin increased 590 basis points to 46.1%, due to increases in operating utilisation and rates, tightly managing costs, and realising the benefits from the Force and Matilda acquisitions;
  • EHL generated free cash flow of $90 million, enabling the company to invest in a package of strategic growth assets;
  • Gross debt reduced by US$33.8, decreasing the ongoing interest expense;
  • The net leverage reduced to below 2.0x, from 2.6x in FY18, driven by growing earnings and cash flow. This deleveraging was achieved a year earlier than forecast;
  • EHL reported a historically high FY19 return on capital of 21%, up from 13% in the previous cycle peak.

(Source: EHL’s Investor Presentation)

Emeco’s Area of Focus

Amid the strong results of FY19, the company has a significant area which demands continuous improvement in the business- Safety. Even though EHL incurred no lost time injuries during FY19, the total recordable injury frequency rate was up from 1.2 to 4.6, which is not a very healthy sign for any company.

Acknowledging the seriousness of the issue and striving for ‘zero harm’ in the workplace, the company has been taking this seriously and has notably increased its safety resources while taking appropriate actions to enhance the health and safety systems, along with processes and reporting. The target of ‘zero harm’ would continue to be emphasised and EHL’s management remains committed to reducing workplace injuries.

Shareholder Concerns Addressed- Board Update

As per Chairman Mr Peter Richards, during FY19, EHL addressed the several concerns raised by shareholders at last years’ AGM- executive remuneration, incentives and the potential dilutive impact of employee share plans. The Board is committed addressing these issues moving forward and would provide detail on these issues and the actions taken by EHL in the annual report.

The Board is exemplifying sound corporate governance and taking steps towards the same, while concentrating on EHL’s financial stability and strengthening the balance sheet. New Board members are likely to be recruited to bring new skills and add a flavour of diversity.

FY20 Update

After a good FY19 and successfully achieving its strategic objectives, EHL kick started FY20 on a strong not:

  • The Western Region has secured new work in iron ore and gold projects;
  • Demand in the Eastern Region continues to be robust;
  • The growth assets acquired are now all working across various projects and remain on track, expanding earnings capacity and not replacing any of the pre-existing rental fleet working at existing projects.
  • Coal continues to contribute to EHL’s growth, and the company is driving growth in other commodities such as iron ore and gold (particularly with the opportunities in the Western Region).

FY20 Outlook

Given the strong start to the year, the company expects the first half operating EBITDA to range between $118 and $120 million. An icing on the cake, further earnings growth is expected in the second half of the year.

Both the rate and utilisation improvement from EHL’s existing fleet is expected to contribute to the overall growth in revenue and earnings, along with the additional earnings generated by the growth assets that were acquired last year.

The acquired growth assets remain on track to generate $25 million in EBITDA in FY20. Force workshops too is expected to carry the growth baton forward, as the company lays emphasis on increasing throughput in the workshops, with the internal fleet requirements and for the customers.

Moreover, the positive synergies between EHL’s rental and maintenance businesses are likely to cater customers with a complete solution from the company’s assets, highly skilled workforce and EHL’s asset management capability. The company would continue to vigilantly seek prospects to build on its business model and widen the value proposition to attain growth and sustainability.

As stated by Mr Testrow, in a nutshell, EHL aims to ensure that the business is more stable and resilient through the cycle, as the management team remains confident that the company is on the strongest footing it has been in a long time, which calls for a future reward to shareholders as well (in the form of dividends).

Share Price Information

EHL quoted $2.115, moving up by 3.171% (at AEST 1:06 PM) as on 15 November 2019. The company has a market cap of $662.59 million and was trading with approximately 323.21 million outstanding shares.

Its P/E multiple is 18.210x and the current EPS is $0.113. In the last six months, the stock has generated 11.41% return and its YTD return is 1.99% (as on 14 November 2019).


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