Company Overview: Emeco Holdings Limited (ASX: EHL) is engaged in the provision of rental of mining equipment to miners. The Group also provides equipment and mining services which comprise of maintenance, component rebuild, fleet optimisation, and engineering services. Its business domains can be segregated under three heads – Rental, Workshops, and Pit N Portal.

EHL Details

Resilient Business Performance Aided by Pit N Portal Integration: The company is focused on building a sustainable and resilient business model, driven by a disciplined capital structure framework. In this regard, it has been making continued investments in its people and processes and has planned for intensive capex programs in FY22.

Business Segments Poised for Growth:

Rental:

• The segment delivered resilient earnings performance in FY21, despite the weak coal conditions during the year. There has been an improvement of ~2% in rental earnings in H2FY21, compared to H1FY21. The decent earnings momentum in Q4FY21 is expected to support further earnings recovery in FY22.

Pit N Portal:

• The company expects strong growth in earnings going ahead from the Pit N Portal business unit, as projects ramp-up to production and new projects commences.

Force Workshops:

• The business segment has diversified its presence with long-term committed work from additional customers. Moreover, external work has continued to be solid and along with margin improvement, there is an expectation of EBITDA growth moving ahead.

FY21 Performance Overview:

EHL delivered a resilient performance in FY21, despite the COVID-19 headwinds, and demonstrated strong earnings momentum in Q4FY21.

• Revenues improved to $620.5 million in FY21, compared to $540.4 million in FY20. This reflected an increase of ~15% owing to an increase in services revenue and full-year contribution from the Pit N Portal business.
• The Group reported operating EBITDA of ~$238 million in FY21, which was at the upper end of the guidance range of $235-$238 million.
• Operating EBIT stood at ~$119 million in FY21, compared to ~$139 million in FY20, impacted by lower EBITDA and full-year deprecation effect of Pit N Portal business.
• The company posted an operating NPAT of ~$57 million in FY21, which has been benefitted from lower interest costs following debt repayments during the year.
• It ended the period with a cash position of $74.72 million as of 30 June 2021, compared to $198.16 million as of 30 June 2020. The decrease in cash levels is mainly on account of the repayment of borrowings during the year.

Increasing Trend in Revenue (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 54.98% of the total shareholding, while the top 4 constitute the maximum holding. Black Diamond Capital Management, L.L.C. and Paradice Investment Management Pty. Ltd. are holding a maximum stake in the company at 29.61% and 9.73%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company reported an improvement in gross margin performance to 46.1% in FY21, compared to 25.1% in FY20. Net margin stood at 3.3% in FY21, compared to 12.2% in FY20, owing to an increase in depreciation costs during the year. EHL also reported significant improvement in the debt-to-equity ratio to 0.56x as of FY21 end, down from 1.74x as of FY20 end.

Profitability Metrics & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Commodity Price Risk: The Group is prone to the risk of volatility in commodity prices, as its business depends on the activity levels of its clients.
• Credit Risk: It is exposed to the risk of a counterparty defaulting on its contractual or payments obligations.
• Financial Risk: EHL’s line of business also makes it prone to the risks of currency fluctuations, changes in interest rates and equity prices.

Outlook: The Group expects growth across all operating segments in FY22, augmented by continued growth in Western Rental and Pit N Portal business. It also anticipates an improvement in business in the Eastern Region as and when the existing latent capacity is redeployed. EHL plans to expand its revenue base with diversification in commodities and focus on winning long-term projects. It expects to continue with its growth initiatives and anticipates FY22 net sustaining capex to be in the range of $140-$150 million.

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 company updated that Ms Thao Pham, Chief Strategy Officer, will assume the role of interim Chief Financial Officer, effective from 30 September 2021, following the departure of Mr Neil Siford. As per ASX, the stock of EHL is trading above its average 52-weeks’ levels of $0.730-$1.370. The stock of EHL gave a positive return of ~6.84% in the past one month and a negative return of ~2.49% in the past three months. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average, considering the impact of deprecation costs, impact in commodity prices, and inherent risks present in the sector. For the purpose of valuation, few peers like MACA Ltd (ASX: MLD), Macmahon Holdings Ltd (ASX: MAH), Acrow Formwork and Construction Services Ltd (ASX: ACF) have been considered. Considering the expected upside in valuation & current trading levels, resilient top-line performance, reduction in debt levels, strong operating segments, optimistic long-term outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.105, (as on 12 October 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia).

EHL Daily Technical Chart, Data Source: REFINITIV

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.

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

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